THE  LIBRARY 

OF 

THE  UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


1925 


LUb  ANGELES 
STATE  NOHMAL  SCHOOL 


UNIVERSITY  of  CALIFORNi: 
AT 
LOS  ANGELES 
UBHARY 


Graduate  School  of  Business  Administrations 
University  of  California 
Los  Angeles  £4,  California  ^ 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/corporationaccouOObenniala 


Corporation  Accounting 


R.  J.  BENNETT,  C.P.A. 

Director,  Bennett  Accountancy  Institute;  Author, 
«*C,P.A.  Questions  and  Answers,"  etc.;  Member, 
Institute  of  Chartered  Accountants,  Ontario;  Member, 
Pennsylvania  Institute  of  Certified  Public  Account- 
ants; Member,  American  Institute  of  Accountants. 


(Fourth   Printing) 


NEW    YORK 

THE    RONALD    PRESS    COMPANY 

1917 

4ooe)3 


Copyright,  1916,  by 
The  Ronald   Press   Company 


Wautm  O.  HewiU  Press,  Brooklyn,  PrtnUn 
J.  F.  Tapleiy  Co.,  New  York.  Binders 


Bus.  Admin. 
Liibrary 

HF 
C  154- 


Co  jHp  jRotl^tr, 

The  Late  Ellen  Bartley  Bennett, 

This  Book   Is  Affectionately 

Dedicated 


PREFACE 

Corporation  accounting  does  not  differ  in  its  essentials 
from  the  accounting  of  any  other  form  of  business  organi- 
zation. There  are,  however,  certain  transactions,  accounts, 
and  entries  employed  in  it  which  are  either  peculiar  to  the 
corporation  or  so  seldom  encountered  elsewhere  that  they 
may  properly  be  termed  distinctive.  It  is  with  these  dis- 
tinctive transactions  and  their  accounting  treatment  that  the 
present  volume  concerns  itself,  and  not  with  the  general 
problems  of  accountancy. 

As  companies  are  formed;  as  stocks  of  differing  char- 
acteristics are  subscribed  for,  issued  on  varying  terms,  for- 
feited, donated,  resold  or  cancelled;  as  bonds  of  different 
classes  are  issued,  sold,  purchased  or  redeemed  at  maturity; 
as  sinking  funds  and  reserves  are  set  up  for  the  protection 
and  redemption  of  these  bonds;  as  dividends  are  declared 
or  assessments  are  levied;  as  companies  are  reorganized, 
liquidated,  or  become  insolvent,  the  accountant  is  confronted 
with  difficult  problems — problems  which  frequently,  because 
of  the  magnitude  of  the  amounts  involved,  or  because  of  the 
legal  consequences  of  error,  call  for  a  care  and  accuracy  of 
treatment  beyond  the  ordinary. 

In  all  these  matters  the  corporation  accountant  may 
well  profit  by  the  experience  of  those  who  have  already 
grappled  with  and  solved  these  problems,  and  it  is  the  pur- 
pose of  this  volume  to  present  such  solutions  and  to  set 
forth  the  established  practice,  wherever  practice  has  been 
established.    In  this  the  author  trusts  he  has  been  successful. 

It  must  be  said,  however,  that  in  the  treatment  of  many 
corporate  transactions,  practice — ^and  good  practice — is  not 


VI 


PREFACE 


uniform,  though  the  final  result  is,  of  course,  the  same. 
Where  this  is  true,  the  author  has  endeavored  to  g^vc  all 
the  methods  of  treatment  in  good  accounting  use. 

It  may  also  be  noted  that  most  of  the  illustrative  entries 
in  the  present  work  are,  for  the  sake  of  clearness  and 
simplicity,  given  in  journal  form  even  though  many  of 
them  are  cash  entries  that  in  practice  would  appear  only  in 
the  cash  book. 

A  considerable  amount  of  space  has  been  devoted  to 
those  details  of  corporate  organization,  practice,  and  proce- 
dure which  more  directly  affect  the  work  of  the  accountant. 
This  information  is  so  essential  to  the  proper  understanding 
and  handling  of  the  corporate  accounts,  that  the  author  felt 
that  it  should  not  be  omitted.  Much  of  this  has  been  taken 
from  the  works  on  corporate  organization  and  management 
by  Mr.  Thomas  Conyng^on,  to  whom  the  author  extends  his 
sincere  thanks. 

The  author  also  gratefully  acknowledges  the  valuable 
assistance  given  by  corporation  officials,  bankers,  corporation 
accountants,  public  accountants  and  others,  and  especially 
by  brother  members  of  the  Pennsylvania  Institute  of  Cer- 
tified Public  Accountants. 

R.  J.  Bennett. 
Philadelphia,  Pa. 
October  i.  1916. 


CONTENTS 


PART    I— CORPORATION    ORGANIZATION    AND 
PROCEDURE 

Page 
I 


to 


Chapter 

I     The 

Corporate  Form 

§    I. 

Business  Organization 

2. 

The  Corporation 

3. 

Kinds  of  Corporations 

4- 

Public  Utility  Corporations 

5. 

Corporations    Created    by    and    Subje 

State  Laws 

6. 

Procedure  for  Incorporation 

7. 

Nature  of  the  Corporation 

8. 

The  Charter 

9. 

The  By-Laws 

10. 

Management  of  the  Corporation 

II. 

Capital  Stock 

12. 

Shares  of  Stock 

13. 

Stockholders 

14. 

Certificates  of  Stock 

15. 

Voting 

16. 

Advantages  of  the  Corporate  Form 

17. 

Disadvantages  of  the  Corporate  Form 

18. 

Summary  of  Taxes  and  Reports 

19. 

The  Corporate  Records 

II     Kinds  of  Stock 16 

§  20.  Capitalization 

21.  Capital  Stock  and  Actual  Capital 

22.  Shares  Without  Par  Value 

23.  The  Functions  of  Corporate  Stock 

24.  Nature  of  Stock 

25.  Issued  and  Unissued  Stock 

26.  Full-Paid  and  Partly  Paid  Stock 

27.  Treasury  Stock — Donated  Stock 

vii 


••• 

VUl 

CONTENTS 

Chapter 

2a 

G)mnion  and  Preferred  Stock 

29. 

Dividends  on  Preferred  Stock 

30. 

Convertible  Stock 

31- 

Guaranteed  Stock 

32. 

Watered  Stock 

Ill     Meetings;  the  Corporate  Calendar     . 

§  33. 

The  Annual  Meeting 

34. 

Time  of  Annual  Meeting 

35- 

Preliminary      Arrangements      for      Annual 

Meeting 

36. 

Annual  Meeting — Closing  Transfer  Books 

37. 

—Stockholders'     List;     No- 

tices ;  Proxies 

38. 

"       —Quorum 

39. 

•'              "       — Opening  Formalities 

40. 

"             "       — Election  of  Directors 

41. 

"              "       — Cumulative  Voting 

42. 

"              "       — Reports 

43- 

"             "      — Minutes 

44. 

Directors'  Meetings 

45- 

Special  Meetings 

46. 

The  Corporate  Calendar 

47- 

Contents  of  Corporate  Calendar 

48. 

Form  of  Corporate  Calendar 

Page 


30 


PART    II— CORPORATION    RECORDS    AND 
ACCOUNTS 


IV     The  Books  and  Records  of  a  Corpora- 


tion   

§  49.  Books  of  Accounts 

50.  Requirements 

51.  Inspection  of  Corporate  Records 

52.  Corporate  Books  of  Record 

53.  The  Minute  Book 

54.  Stock  Subscriptions 

55.  The  Subscription  Book  or  List 


44 


s 


CONTENTS  ix 

Chapter  Page 

56.  Instalment  Receipts 

57.  Stock  Scrip 

58.  The  Instalment  Book 

V     The  Books  and  Records  of  a  Corpora- 
tion (Continued) 60 

§  59.    Treasurer's   Receipt   for   Subscription   Pay- 
ment 

60.  Stock  Certificate  Book 

61.  Assignment  of  Stock  Certificate 

62.  Stock  Transfer  Book 

63.  Register  of  Transfers 

64.  Stock  Register 

65.  Stock  Book  or  Stock  Ledger 

66.  Form  of  Stock  Book  or  Stock  Ledger 

67.  Dividend  Book 

68.  Dividend  Order 


VI     Distinctive  Corporate  Accounts   .        .     80 

§  69.  Accounts  Peculiar  to  Corporate  Bookkeeping 

70.  Capital  Stock — Common    v   y 

71.  Capital  Stock — Preferred  ^  ' 

72.  Capital  Stock  Authprized  V 

73.  Unissued  Stock   v^ 

74.  Subscriptions  to  Stock 

75.  Capital  Stock  Subscribed 

76.  Instalment  Account 
TJ.  Treasury  Stock 

78.  Donation  Account 

79.  Premium  on  Capital  Stock 

80.  Capital  Stock  Without  Par  Value 

81.  Organization  Expenses 

82.  Surplus  \/ 

83.  Dividends  v 

84.  Bonds 

85.  Bond  Premium 

86.  Bond  Discount 

87.  Interest  on  Bonds 

88.  Accrued  Interest  on  Bonds 

89.  Sinking  Fund  v 

90.  Sinking  Fund  Reserve  ^ 


Chapter 


CONTENTS 

Page 

91. 

Sinking  Fund  Income 

92. 

Good-Will 

93- 

Investment  in  Stocks 
Companies 

and 

Bonds 

of 

Other 

PART    III  — SPECIAL    ENTRIES    RELATING    TO 
TRANSACTIONS  IN   STOCK  AND  DIVIDENDS 

VII     Stock  of  Original  Issue  ....   loi 

§    94.    General  Conditions 

95.  Pro  Forma  Statement 

96.  Opening  Entries — Stock  Full-Paid  (Plan  i) 

97.  "  "       -    "  "  (    "     2) 

98.  Stock  Sold  on  Instalments  (Plan  i) 

99.  Stock    Sold    on    Instalments     (Plan    i) — 

Ledger  Accounts 

100.  Stock  Sold  on  Instalments  (Plan  2) 

101.  Sale  of  Stock  After  Organization 

102.  Stock  Sold  Below  Par 

103.  Stock  Sold  Above  Par 

104.  Stock  Issued   at   a   Premium   to  Create  a 

Surplus 

105.  Payment  of  Salaries  in  Stock 

106.  Payment  of  Commissions  in  Stock 

VIII    Treasury  Stock  and  Stock  of  Other 

Companies 119 

Transactions  in  Treasury  Stock 
§  107.    Donated  Stock 

108.  "  "    —First  Method  of  Entry 

109.  "  "    —Second  Method  of  Entry 

110.  Bonus  Paid  in  Stock 

111.  Purchase  and  Sale  of  Corporation's  Own 

Stock 

112.  Entries  for  Purchase  and  Sale  of  Corpora- 

tion's Own  Stock 


CONTENTS  xi 

Chapter  Page 

Transactions  in  Stock  of  Other  Corporations 

113.  Purchase  and  Sale  of  Stock  of  Other  Cor- 

porations 

114.  Entries  for  Purchase  and  Sale  of  Stock  of 

Other  Corporations 

115.  Entries    When    Stock    is    Exchanged    for 

Stock  of  Other  Corporations 

IX     Dividends  and  Their  Entry    .        .        .133 

§  116.  The  Nature  of  Dividends 

117.  Directors'  Powers  as  to  Dividends 

118.  Informal  Distribution  of  Corporate  Profits 

119.  Surplus — Equalizing  Dividends 

120.  Declaration  of  Dividends 

121.  Notice  of  Dividend 

122.  Ownership  of  Dividends 

123.  Payment  of  Dividends 

124.  Dividend  Sheet  or  Book 

125.  Entries  for  Cash  Dividends 

126.  Dividends  Paid  with  Borrowed  Money 

127.  Entries  for  Scrip  Dividend 

128.  Entries  for  Special  and  Interim  Dividends 

X     Dividends    and    Their    Entry     (Con- 
tinued)        147 

§  129.  Entries    for    Dividends    Applied   to    Stock 
Subscriptions 

130.  Entries  for  Cumulative  Dividends 

131.  Entries  for  Stock  Dividends 

132.  Entries  for  Bond  Dividends 

133.  Bank  Dividends 

134.  Property  Dividends 

135.  Unearned  Dividends 

XI     Proprietorship  Incorporated  (New 

York) 156 

§  136.  Organization  Procedure 

137.  General  Provisions 

138.  Financial  Details  of  the  Incorporation 

139.  Certificate  of  Incorporation 


xii  CONTENTS 

Chapter  Page 

14a  Filing  the  Certificate  of  Incorporation 

141.  First  Meeting  of  the  Stockholders 

142.  Minutes  of  First  Meeting  of  Stockholders ; 

By-Laws 

143.  Minutes  of  First  Meeting  of  Directors;  the 

Stock  Book 

144.  Journal  Entries 

145.  Cash  Book  Entries 

146.  Other  Entries 

XII     Manufacturing  and  Mining  Corpora- 
tions          166 

Manufacturing  Corporation 
§  147.    Details  of  Incorporation 

148.  Statutory  Records 

149.  The  Books  of  Account 

150.  Journal  Entries 

151.  Cash  Book  Entries 

152.  The  Ledger  Accounts 

Mining  Corporation 

153.  Details  of  Incorporation 

154.  Opening  Entries 

155.  Entries  for  Donated  Stock 

156.  Entries  for  Forfeited  Subscription 

XIII     Partnerships  Incorporated    .        .        .   177 

§  157.  Good-Will 

158.  Determination  of  the  Value  of  Good-Will 

159.  Accounting  Treatment  of  Good-Will 

160.  Conditions  of  the  Incorporation 

161.  Agreement  for  Incorporation 

162.  Allotment  of  Stock 

163.  Underwriting  Expenses 

164.  Balance  Sheets  of  the  Incorporating  Firms 

165.  Statutory  Requirements 

166.  Opening  Entries 

167.  Qosing  the  Partnership  Books 

168.  Gosing  Entries  on  Books  of  Lowell,  Ma- 

son &  Company 

169.  Closing  the  Books  of  Oliver  &  Dickson 

170.  Balance  Sheet  of  New  Company 


CONTENTS  xiii 

PART    IV— CORPORATE    BOND    ISSUES 


Chapter 

Page 

XIV 

The  Corporation  Bond     ....    197 

§  171. 

Nature  of  the  Bond 

172. 

Authorization  of  Bond  Issues 

173- 

Constitutional  and  Statutory  Provisions  Af- 
fecting Bond  Issues 

174. 

Procedure  in  Issuing  Bonds 

175- 

Preparation  of  Bonds 

176. 

Terms  Used  in  Connection  with  Bonds 

177. 

Issued  and  Outstanding  Bonds 

178. 

Sinking  Funds 

179. 

Sale  of  Bonds 

180. 

Liabilities  of  Vendor 

181. 

Rights  of  Holders 

XV     Classification  of  Bonds  ....  208 

§  182.  General  Classification 

183.  Debentures 

184.  Mortgage  Bonds 

185.  Coupon  Bonds 

186.  Registered  Bonds 

187.  Kinds  of  Bonds 

188.  First  Mortgage,  etc.,  Bonds 

189.  Junior  Lien,  etc.,  Bonds 

190.  Gold,  etc.,  Bonds 

191.  Convertible  Bonds 

192.  Serial  Bonds 

193.  Redeemable  Bonds 

194.  Profit-Sharing,  etc..  Bonds 

195.  Income  Bonds 

196.  Collateral  Trust  Bonds 

197.  Guaranteeed  Bonds 

198.  Consolidated,  etc.,  Bonds 

199.  Interest  Bonds 

200.  Terminal,  etc.,  Bonds 

201.  Car  Trust  Bonds 

202.  Purchase  Money  Bonds 

203.  Short  Term  Notes 

XVI     Bond  Forms 221 

§  204.  Form  of  Bond 


XIV 


CONTENTS 


Chapter 


XVII 


205.  Form  and  Nature  of  Coupon 

206.  Trustee's  Certificate 

207.  Deed  of  Trust 

208.  Recitals  of  Deed  of  Trust 

209.  Duties  of  Trustee 

210.  Execution  and  Filing  of  Deed  of  Trust 

211.  The  Bond  Register 

212.  Form  of  Bond  Register 

213.  Payment  of  Coupons 

214.  The  Coupon  Register 

Bond  Sales 

§  215.  Selling  the  Bonds 

216.  Bond  Issue  Regulations 

217.  First  Mortgage  Bonds  Sold  at  Par 

218.  Entry  on  Sale  of  Bonds 

219.  Bonds  Sold  at  Par  and  Accrued  Interest 

220.  Bond    Subscriptions    Paid    for    in    Instal- 

ments 

221.  Guaranteed  Bonds 

222.  Entries  for  Collateral  Trust  Bonds 

223.  Entries  for  Short  Term  Notes 

224.  Entries  for  Equipment  Trust  Serial  Bonds 


Page 


239 


XVIII    Bond  Interest 

§  225.  Paying  Bond  Interest 

226.  Method  of  Handling  Interest  Coupons 

227.  Interest  on  Registered  Bonds 

228.  Bond  Interest  Accrued  Monthly 

229.  Interest  on  Two  or  More  Bond  Issues 

230.  Interest  on  Treasury  Bonds 

231.  Interest  on  Guaranteed  Bonds 

232.  Interest  on  Income  Bonds 

233.  Interest  on  Special  Bond  Issues 

234.  Interest  Charged  to  Construction 

235.  Income  from  Investments 


.    252 


XIX     Bond  Discount  and  Premium  . 

§  236.  Bonds  Sold  Above  or  Below  Par 

237.  Bonds  Sold  Between  Interest  Dates 

238.  Expenses  of  Bond  Issue 

239.  Entries  for  Bond  Discount  and  Expense 


266 


CONTENTS  XV 

Chapter  Page 

240.  Entries  for  Bond  Premium 

241.  Nature  of  Bond  Premium  and  Discount 

242.  Treatment  of  Bond  Premium  and  Discount 

243.  Effective  Rate  Method 

244.  Varying  Conditions  Affecting  Annual  Charge 

245.  Methods  of  Determining  Charge  to  Income 

246.  Operation  of  the  Various  Methods  of  De- 

termining Annual  Charge  to  Income 

247.  Determining    Annual    Charge    when    Pro- 

portionate Discount  Is  Written  Off 

XX     Sinking  Funds 279 

§  248.  Function  of  the  Sinking  Fund 

249.  Creation  of  the  Sinking  Fund 

250.  Sinking  Fund  Created  Out  of  Profits 

251.  Safeguarding  the  Sinking  Fuujd 

252.  Adequacy  of  the  Sinking  Fund 

253.  Annuity  Method  for  Sinking  Funds 

254.  Calculating  Fund  Annuities 

255.  Sinking  Fund  to  Retire  Preferred  Stock 

XXI     Sinking  Funds  (Continued)      .        .        .   289 

§  256.  Sinking  Fund  Account 

257.  Entries  for  Sinking  Fund  Instalments 

258.  Entries  for  Sinking  Fund  Interest 

259.  Entries  for  Sinking  Fund  Investments 

260.  Entries    for    Investment    in    Issuing    Com- 

pany's Bonds 

261.  Entries  for  Bonds  Cancelled  Through  Sink- 

ing Fund 

262.  Entries  for  Sinking  Fund  Reserve 

263.  The  Sinking  Fund  on  the  Balance  Sheet 

264.  Entries  on  Books  of  Sinking  Fund  Trustee 

XXII     Redemption  of  Bonds        ....  305 

§  265.    Plans  for  Redeeming  Bonds 

266.  (i)  Redemption  of  Bonds  Through  Sink- 

ing Fund 

267.  (2)  Bonds  Drawn  by  Lot  for  Redemption 

268.  Entries  for  Bonds  Called  for  Redemption 

269.  (3)  Refunding  Bonds 

270.  Entries  for  Refunding  Bonds 


XVI 

Chapter 


271. 
272. 
273- 
274. 
275- 

27B. 


CONTENTS 


(4)  Redemption  of  Serial  Bonds 

(5)  Entries  for  Convertible  Bonds 
Redemption  of  Collateral  Trust  Bonds 
Redemption  of  Short  Term  Notes 
Redemption  of  Equipment  Trust  Bonds 
Redemption  of  Guaranteed  Bonds 
Bonds  in  Default 

Destroying  Bonds 


Page 


PART   V— CORPORATION    REPORTS    AND 
STATEMENTS 


XXIII 


XXIV 


Closing  the  Books  ;  Reserve  Funds  and 
Surplus 320 

§  279.    Qosing  the  Books 

280.  Procedure  in  Closing  the  Books 

281.  Closing  the  Ledger 

Reserve  Funds 

282.  Reserve  Accounts 

283.  Reserve  Accounts  and  Reserve  Funds 

284.  Secret  and  Hidden  Reserves 

285.  Depreciation 

286.  Methods  of  Handling  Depreciation 

287.  Reserve  for  Depreciation 

288.  Operation  of  Reserve  for  Depreciation  Ac- 

count 

289.  Sinking  Fund  for  Exhaustion  of  Mines 

290.  Insurance,  Benefit,  and  Accident  Funds 

Surplus 

291.  Surplus  or  Undivided  Profits  Account 

292.  Contributed  Surplus 

293.  Investments  of  Surplus 


Forms  of  Statements       .        .        .        . 

§  294.  Corporate  Reports 

295.  Necessity  for  Reports 

296.  Form  of  Statements 

297.  Balance  Sheets 

298.  Statements  of  Income  and  Profit  and  Loss 

299.  Statement  of  Cash  Receipts  and  Disburse- 

ments 


338 


CONTENTS  xvii 


Chapter 

Page 

XXV 

Preparation   of   Statements  —  Manu- 

facturing Corporation         .        .        .  352 

§  300.    Trial  Balance 

301.    Manufacturing  Account 

302.    Balance  Sheet 

303.     Trading  and  Profit  and  Loss  Account 

304.     Closing  Entries  in  Journal 

305.     Comments  on  Closing  of  Lake  Manufac- 

turing Company's  Books 

XXVI     Preparation  of  Statements — Trading 

Corporation 365 

§  306.  Trial  Balance 

307.  Trading  and  Profit  and  Loss  Statement 

308.  Balance  Sheet 

309.  Closing  Journal  Entries 

310.  Comments    on    Qosing    of    Bryant-Chase 

Company's  Books 

XXVII     Corporate  Reports 374 

§  311.  Special  Reports 

312.  Reports  to  Stockholders 

313.  Reports  of  Officers  and  Committees 

314.  Committee  Reports 

315.  Auditor's  Report 

316.  General  Manager's  Report 

317.  Treasurer's  Report 

318.  President's  Report 

319.  Statutory  Corporation  Reports 

320.  The  Annual  Report 

321.  Federal  Corporation  Report 

322.  Taxable  Corporations 

323.  Exempted  Corporations 

324.  Return  Made  for  Either  Calendar  or  Fiscal 

Year 


PART   VI— CORPORATE    COMBINATIONS 
XXVIII     Methods  of  Consolidation      .        .        .   390 

§  325.    Purposes  of  Corporate  Combination 


xviii  CONTENTS 

Chapter  Page 

326.  Methods    of    Corporate    Consolidation    or 

Control 

327.  Expert  Investigations 

Accounting  Investigation  Preliminary  to 
Consolidation 

328.  Scope  of  Investigation 

329.  Report  on  Assets 

330.  Report  on  Liabilities 

331.  Revenue  and  Expense  Accounts 

332.  Cost  of  Operation 

333.  Reports  and  Certificates 

XXIX    Consolidation  by  Merger       .        .       .  403 

§  334'  General  Procedure  for  Merger 

335'  General  Conditions  of  the  Merger 

336.  Statement  of  Concerns  to  be  Merged 

337.  Terms  of  Merger 

338.  Requirements  for  the  Consolidation 

339.  Procedure  for  Consolidation 

340.  Opening  Entries  on  Books  of  New  Cor- 

poration 

341.  (i)  Entries    for    Issuance   of    Stock    and 

Bonds 

342.  (2)  Entries     for     Assets    and    Liabilities 

Taken  Over 

343.  (3)  Entries  for  Retirement  of  Outstanding 

Bonds   and   Mortgages   of  the   Merging 
Concerns 

344.  (4)  Entries  Relating  to  Sale  of  Securities 
345-     (5)  Entry  in  Settlement  of  Intercompany 

Obligfations 

346.  The  Conduct  of  the  Branches 

347.  Qosing  Entries  for  Long  Company 

348.  Qosing  Entries  for  Vine  Company ;  Bell  & 

Davis 

349.  Closing  Entries  for  Bain  Company 

350.  Balance  Sheet  for  Bain  Branch 

351.  Consolidated  Balance  Sheet  of  New  Cor- 

poration 

352.  Consolidation  by  Purchase 


CONTENTS 


XIX 


Qiapter 
XXX 


Consolidation  by  Lease   .       .       .       . 

§  353.  Leases 

354.  Entries  for  Property  Leased 

355.  Entries  for  Guarantees 

356.  Lease  Terms 

357.  Entries  for  Lease  of  Mine 

358.  Entries  for  Lease  of  Railway 

359.  Entries  for  Improvements  and  Note  Issue 

360.  Adjusting  Entries  at  End  of  First  Year 

361.  Entries  for  Union  Mining  Company 

362.  Balance  Sheet  of  Union  Mining  Company 

363.  Entries    for  Wilson  Transportation   Com- 

pany 


Page 
429 


XXXI     Holding  Companies 

§  364.  Classification  of  Holding  Companies 

365.  Controlling  Corporations 

366.  Status  of  the  Subsidiary  Company 

367.  Legality  of  Holding  Companies 

368.  Accounting  Procedure  of  Holding  Company 

369.  Accounting  Requirements 

370.  Operating  Company  Purchasing  Controlling 

Interest 

371.  Entries  on  Books  of  Purchasing  Company 

372.  Entries  on  Books  of  Selling  Company 

373.  The  Consolidated  Balance  Sheet 

374.  Parent  Companies 


441 


XXXII     Consolidated  Balance  Sheets 

§  375.  Purposes  of  Consolidated  Balance  Sheet 

376.  Contents  of  Consolidated  Balance  Sheet 

277.  Preparation  of  Consolidated  Balance  Sheet 

378.  Consolidated    Balance    Sheet    with    Inter- 

company Details 

379.  Consolidated  Balance  Sheet  without  Inter- 

company Details 

380.  Additional     Illustrations     of     Consolidated 

Balance  Sheets 

381.  Consolidated  Income  Account 


456 


XX 


CONTENTS 


PART  VII— REORGANIZATIONS,  RECEIVER- 
SHIPS AND  DISSOLUTIONS 
Chapter  ~  Page 

XXXIII     Reorganization  by  Agreement      .        .  469 

§  382.  Definition  of  Reorganization 

383.  Methods  of  Reorganization 

384.  Reorganization  by  Reduction  of  Stock 

385.  Balance  Sheet  Before  Reduction  of  Capital 

Stock 

386.  Accounting  Requirements 

387.  (a)  Procedure 

388.  (b)  Entries  and  Records 

389.  Conditions  of  Reorganization 

•  390.    Balance  Sheet  Before  Adjustment 

391.  Plan  of  Adjustment  Adopted 

392.  Accounting  Requirements 


XXXIV     Receivership 

§  393-  Receivers 

394.  Appointment  of  Receivers 

395.  Powers  of  Receivers 

396.  Liability  of  Receivers 

397.  Receivers  in  Bankruptcy  Cases 

398.  The  Receiver's  Accounts 

399.  The  Company's  Accounts  During  Receiver- 

ship 


481 


XXXV     Receivership  and  Reorganization 

§  400,  Preliminaries  to  a  Receivership 

401.  Reorganization  Agreement 

402.  Conditions  Preceding  Receivership 

403.  Statement  of  Affairs 

404.  The  Receiver's  Activities 

405.  Accounting  Procedure 

406.  (i)  Receiver's  Records  on  Taking  Charge 

407.  (2)  Record  of  Receiver's  Transactions 

408.  (3)  Receiver's  Closing  Entries 

409.  (4)  Receiver's  Statement  to  the  Court 

410.  (5)  Adjustment   of   Company's   Books  on 

Appointment  of  Receiver 


487 


CONTENTS 


XXI 


Chapter 


411.  Entries  to  Adjust  Inventories 

412.  (6)  Entries  on  Termination  of  Receivership 


Page 


XXXVI     Receivership  and  Sale     .        .        .        . 

§  413.  Introductory 

414.  Statement  of  Condition 

415.  (i)  Receiver's  Records  on  Taking  Charge 

416.  (2)  Entries  to  Record  Receiver's  Activities 
417-  (3)  Receiver's  Statement  of  Condition 
418.  (4)  Entries  for  Sale  and  Dissolution 


508 


XXXVII     Dissolution  of  Corporations  . 

§  419.  Voluntary  Dissolution 

420.  Dissolution  Through  Bankruptcy 

421.  The  Deficiency  Account 

422.  Realization  and  Liquidation  Account 

423.  Statement  of  Condition 

424.  (i)   Statement  of  Affairs 

425.  (2)  Deficiency  Account 

426.  Trustee's  Cash  Account 

427.  (3)  The   Realization  and  Liquidation  Ac- 

count 


517 


Appendix — Incorporation  Forms       .        .        .        . 

1.  New  York  Charter 

2.  By-Laws 

3.  Certification  of  By-Laws 

4.  Minutes  of  First  Meeting  of  Stockholders 

5.  Proxy— First   Stockholders'  Meeting 

6.  Call    and    Waiver    of    Notice — First    Meeting    of    Stock- 

holders 

7.  Minutes  of  First  Meeting  of  Directors 

8.  Call  and  Waiver  of  Notice — First  Meeting  of  Directors 


529 


;•■        .■'^ 


Corporation  Accounting 

Part  I — Corporation  Organization  and  Procedure 


CHAPTER    I 

THE   CORPORATE   FORM 

§  I.    Business  Organization 

There  are  three  general  forms  under  which  business 
activities  are  conducted,  viz. :  the  single  proprietorship,  the 
partnership,  and  the  corporation.  In  a  single  proprietor- 
ship the  business  is  conducted  by  an  individual  on  his  own 
account  and  for  his  own  benefit.  In  a  partnership  the  busi- 
ness is  owned  by  two  or  more  individuals  and  is  conducted 
on  a  co-operative  basis  for  mutual  benefit,  the  partners 
participating  in  its  management  and  in  its  profits.  Under 
the  corporate  form,  business  is  conducted  for  the  benefit 
of  the  stockholders  of  the  corporation  by  a  board  of  directors 
elected  by  them.  The  corporation  owns  the  business,  and 
the  stockholders  own  the  corporation ;  so  practically,  though 
not  technically,  the  stockholders  own  the  business. 

§  2.    The  Corporation 

A  corporation  is  an  association  of  individuals  authorized 
by  law  to  act  as  a  whole  under  a  corporate  name  and  for 
some  particular  purpose  or  purposes.  The  word  "company" 
is  used  synonymously  with  "corporation,"  with  reference  to 
business  organizations. 

I 


2  ORGANIZATION    AND    PROCEDURE 

The  Stock  corporation  is  one  whose  authorized  capital, 
or  "capital  stock,"  is  divided  into  shares,  each  of  which 
represents  a  definite  interest  in  the  corporation,  and, 
ordinarily,  entitles  the  owner  of  record  to  vote  at  corporate 
meetings  and  to  participate  both  in  corporate  profits  and  in 
the  assets  of  the  corporation  on  its  dissolution.  The  shares 
are  called  "stock,"  and  their  owners  "stockholders." 

In  many  states,  corporations  formed  to  carry  on  mining, 
manufacturing,  or  mercantile  enterprises  are  called  "busi- 
ness corporations,"  to  distinguish  them  from  banking  and 
insurance  companies,  which  are  termed  "moneyed  or  finan- 
cial corporations,"  and  from  railroad,  telegraph,  telephone, 
ferry,  and  other  like  companies,  which  are  called  transporta- 
tion or  public  utility  corporations.  While  moneyed  and 
public  utility  corporations  are  usually  subject  to  much 
stricter  regulations  than  "business  corporations,"  they  enjoy 
more  extensive  powers. 

§  3.    Kinds  of  Corporations 

Generally  speaking,  there  are  two  kinds  of  corporations 
— those  conducted  for  profit,  and  those  not  conducted  for 
profit.  Corporations  for  profit  include  railroad,  banking, 
insurance,  public  utility,  manufacturing,  and  trading  com- 
panies. Corporations  not  for  profit  are  conducted  for 
the  benefit  of  the  community,  as  municipalities,  hospitals, 
churches,  and  charitable,  social,  and  literary  societies.  Under 
the  Pennsylvania  statutes  these  latter  are  known  as  "cor- 
porations of  the  first  class,"  while  those  conducted  for  profit 
are  classified  as  "corporations  of  the  second  class." 

Under  the  New  York  statutes  the  classification  is  as 
follows : 

1.  Municipal  corporations 

2.  Stock  corporations 

3.  Non-stock  corporations 


THE    CORPORATE    FORM  3 

Class  I  includes  towns,  counties,  cities,  villages,  school 
districts,  and  other  territorial  divisions  of  the  state  which 
are  established  by  law  with  powers  of  local  government. 
Class  2  includes  all  corporations  having  a  capital  stock 
divided  into  shares,  and  which  are  conducted  for  profit. 
To  Class  3  belong  those  which  are  conducted  partly  for  the 
well-being  of  their  members,  as  churches,  cemeteries,  co- 
operative organizations,  boards  of  trade,  and  various 
benevolent  institutions, 

§  4.    Public  Utility  Corporations 

Public  utility  corporations  may  be  characterized  as  mixed 
or  quasi-public,  inasmuch  as  they  operate  for  the  convenience 
of  the  public  as  well  as  for  profit  to  the  management.  They 
include  the  various  transportation  organizations,  such  as 
railroad,  street-car,  steamboat,  and  ferry  companies;  the 
telegraph  and  telephone  companies ;  and  the  gas  and  electric 
light  companies.  Such  corporations  are  usually  relieved 
to  some  extent  from  competition,  because  this,  it  is  thought, 
will  result  in  better  service  to  the  public.  Their  activities 
are  regulated  by  the  terms  of  their  franchises  and  by  the 
laws  and  ordinances  of  the  municipalities  in  which  they 
operate.  In  many  states  they  are  subject  to  the  supervision 
of  public  utility  or  public  service  commissions. 

§  5.    Corporations  Created  by  and  Subject  to  State  Laws 

Corporations  are  a  creation  of  the  law,  that  is,  the  laws 
of  each  state  and  of  the  District  of  Columbia  prescribe  the 
manner  in  which  corporations  in  such  state  or  District  shall 
be  formed,  and  they  may  be  formed  only  in  accordance 
therewith — ^unless,  as  is  sometimes  done,  they  are  authorized 
by  a  special  legislative  act — ^and  have  only  such  legal 
existence,  rights  and  powers  as  are  given  them  by  such  laws. 

A  corporation  organized  in  one  state  (or  in  the  District 


4  ORGANIZATION    AND    PROCEDURE 

of  Columbia)  may  operate  in  other  states,  being  known  in 
its  own  state  as  a  "domestic"  corporation,  and  in  other  states 
as  a  "foreign"  corporation.  When  a  corporation  carries  on 
business  in  another  state,  it  must  comply  with  the  laws  of 
that  state  regulating  "foreign"  corporations.  This  is  so 
because  the  rights  and  powers  conferred  by  the  laws  of  its 
own  state  exist  for  it  in  another  state  only  as  a  matter  of 
comity  and  subject  to  any  regulations  imposed  on  "foreign" 
corporations  in  that  other  state. 

To  state  this  more  fully,  "The  corporations  of  one  state 
may  exercise  any  or  all  of  their  powers  in  another  state, 
unless  the  latter  state,  by  its  statutes,  decisions,  or  policy, 
forbids.  This  right  of  a  corporation  to  act  and  contract 
in  any  state  is  due  to  the  spirit  of  comity  between  the  states. 
It  is  constitutional,  however,  for  a  state  to  refuse  to  allow 
that  privilege,  except  as  against  corporations  engaged  in 
interstate  commerce. 

"A  state  may  require  a  foreign  corporation  to  pay  a 
license  fee  before  doing  business  within  its  borders.  A 
statute  of  a  state  prohibiting  a  foreign  corporation  from 
doing  business  in  the  state,  if  such  corporation  is  connected 
with  a  trust,  is  constitutional."* 

As  the  conditions  of  incorporation  and  the  powers  and 
rights  of  corporations  vary  in  the  several  states,  the  laws 
of  the  particular  state  must  be  consulted  when  the  procedure 
for  incorporation  or  the  rights  and  powers  of  corporations 
in  any  particular  state  are  to  be  known.  It  may  also  be 
noted  that  the  laws  with  respect  to  the  organization  of  public 
utility  and  moneyed  corporations  usually  differ  from  those 
under  which  the  ordinary  business  corporation  is  formed. 

§  6.    Procedure  for  Incorporation 

The  state  laws  governing  incorporation  usually  require 


'Cook  on  Corporations,  |  696. 


THE    CORPORATE    FORM  5 

that  three  or  more  persons — termed  "incorporators" — ^must 
take  part  in  forming  a  corporation,  and  that  all  or  a  part  of 
these  must  be  citizens  of  the  United  States.  In  some  cases 
it  is  required  that  one  or  more  must  be  citizens  of  the  state 
in  which  the  corporation  is  organized. 

In  all  the  states  general  laws  have  been  passed  pre- 
scribing the  method  of  incorporation,  together  with  special 
provisions  in  the  case  of  financial  and  public  utility 
corporations.  In  most  states  there  are  special  laws  for 
educational,  benevolent,  and  other  corporations  of  similar 
character,  as  well  as  for  corporations  the  nature  of  whose 
business  calls  for  special  provision. 

The  general  corporation  laws  usually  provide  that  when 
due  and  proper  application  is  made,  with  payment  of  the 
proper  fees,  the  Secretary  of  State  shall  issue  a  charter  in 
accordance  with  the  terms  of  the  application;  or,  where 
actual  issuance  of  the  charter  is  not  required,  the  official 
acceptance  and  filing  of  the  application  authorize,  ipso  facto, 
the  parties  to  organize  as  a  corporation.  In  this  case  the 
application  as  approved  becomes  the  charter  of  the  corpora- 
tion. The  persons  authorized  by  the  charter  to  organize, 
usually  meet  shortly  after  its  issuance  or  filing,  to  elect 
directors,  adopt  by-laws,  and  make  the  necessary  arrange- 
ments for  the  conduct  of  the  corporate  business.  The  pro- 
cedure for  incorporation  in  the  different  states  varies  as  to 
details,  and  in  some  few  states  is  materially  different  from 
that  described  herein.  In  the  great  majority  of  states, 
however,  it  follows  substantially  the  outline  given. 

§  7.    Nature  of  the  Corporation 

The  corporation,  when  created,  is  for  all  practical  pur- 
poses an  individual,  having  power  in  its  corporate  name  to 
carry  on  business,  to  make  contracts,  and  to  sue  or  be  sued. 
It   is   an   entity   entirely   separate    and   distinct    from   its 


6  ORGANIZATION    AND    PROCEDURE 

members,  who  may  die  or  withdraw  without  affecting  the 
corporate  existence.  It  is  subject  to  the  general  laws  of 
the  land  as  is  an  individual,  and  also  to  the  special  state 
laws  made  for  the  regulation  of  corporations.  It  must  also 
conform  strictly  to  the  provisions  of  its  charter.  Its 
members,  called  stockholders,  may  adopt  by-laws  for  its 
guidance ;  but  these  are  subordinate  to  the  charter,  and  both 
are  subordinate  to  the  laws  of  the  state. 

§  8.    The  Charter 

The  charter,  or  certificate  of  incorporation,  is  the 
fundamental  law  of  the  corporation,  corresponding  to  the 
constitution  of  the  state  or  nation.  From  it  the  corporation 
derives  its  existence  and  its  powers.  All  the  important 
features  peculiar  to  a  corporation,  not  secured  by  common 
law  or  necessarily  incident  to  incorporation,  should  appear 
in  its  charter.  These  are  usually  the  name,  purposes,  dura- 
tion, location,  capitalization,  and  the  details  thereof;  also, 
(in  some  states),  the  number  of  directors,  the  names  of 
those  who  are  to  act  for  the  first  year,  and  any  special 
provisions  permissible  by  law  which  the  incorporators  desire 
to  make  a  permanent  part  of  their  organization.  Temporary 
or  less  important  details  may  be  left  for  by-law  or  other 
regulation;  but  all  matters  of  permanence  or  importance 
should,  as  far  as  possible,  be  set  forth  in  the  charter. 

§  9.    The  By-Laws 

As  already  stated,  a  modern  corporation  is  regulated, 
first,  by  the  general  laws  under  which  it  operates;  second, 
by  the  provisions  of  its  charter;  and  third,  by  its  by-laws. 
The  by-law"s  are  the  quasi-permanent  rules  of  corporate 
action,  and  are  usually  adopted  at  the  first  meeting  of  stock- 
holders. Occasionally,  when  specially  authorized  by  the 
charter  or  by  the  laws  of  the  state,  the  directors  also  have 
power  to  pass  by-laws. 


THE    CORPORATE    FORM  7 

§  10.    Management  of  the  Corporation 

The  corporation  is  managed  by  a  board  of  directors 
elected  by  the  stockholders,  and  subject  to  the  provisions 
of  the  corporation's  charter  and  by-laws.  The  number  of 
directors  is  often  prescribed  within  certain  limits  by  the 
state  laws — as,  not  less  than  three  nor  more  than  thirteen 
— and,  within  these  limits,  is  fixed  by  the  charter  or  by-laws. 
The  directors  may  act  only  in  duly  assembled  meetings,  and 
their  decisions  or  instructions,  usually  expressed  in  the 
form  of  resolutions,  are  carried  out  by  the  officers  of  the 
company  or  by  special  agents  appointed  by  the  board  of 
directors. 

The  officers  usually  elected  by  the  board  are  a  presi- 
dent, one  or  more  vice-presidents,  secretary,  treasurer,  and 
sometimes  a  general  manager  as  well.  In  the  larger  cor- 
porations assistants  to  these  officers  are  also  elected.  The 
duties  of  the  officers  are  fixed  in  a  general  way  by  custom, 
but  are  varied  with  the  needs  of  the  particular  corporation. 
The  by-laws  should  state  clearly  the  specific  duties  of  each 
officer.  Occasionally,  the  statutes  prescribe  some  of  the 
official  duties,  as  in  New  Jersey  where  the  statutes  provide 
that  stock  certificates  must  be  signed  by  the  president  and 
treasurer  of  the  corporation. 

The  president  of  a  corporation  usually  has  charge  of  its 
general  business  activities  and  usually  presides  at  all  meet- 
ings of  stockholders  and  directors.  His  powers  and  duties 
should  be  explicitly  set  forth  in  the  by-laws.  The  vice- 
president  performs  the  duties  of  the  president  in  his  absence. 
Any  special  duties  assigned  him  should  be  stated  in  the 
by-laws.  The  secretary  has  charge  of  the  corporate  seal 
and  must  affix  and  attest  it  when  necessary ;  he  usually  takes 
charge  of  the  corporate  records  and  also  of  the  issue  and 
recording  of  stock.  The  treasurer  has  charge  of  the  cor- 
porate finances.     He  signs  all  checks,  sees  to  their  proper 


8  ORGANIZATION    AND    PROCEDURE 

countersigning,  and  usually  participates  in  the  execution  of 
all  instruments  pertaining  to  the  financial  transactions  of 
the  company.  If  a  general  manager  is  chosen  by  the  board, 
he  has  charge  of  the  general  business,  manufacturing,  min- 
ing or  whatever  it  may  be,  but  he  is  not  usually  accounted 
an  officer  of  the  company.  He  is  responsible  to  the  directors 
and  usually  reports  to  them. 

The  profits  of  the  corporate  business  go  to  the  stock- 
holders in  the  form  of  dividends  and  in  proportion  to  their 
holdings  of  stock,  at  such  times  and  in  such  amounts  as  the 
directors  may  decide. 

§  II.    Capital  Stock 

The  capital  stock  of  a  corporation  is  the  amount  of 
stock  which  the  corporation  is  authorized  to  issue.  Its 
amount  is  fixed  by  the  charter  and  may  not  be  changed 
except  by  amendment  thereto. 

The  amount  of  capital  stock  as  fixed  by  the  incorporators 
in  the  charter  application  may  be  based,  (i)  on  the  actual 
cash  value  of  property  to  be  taken  over  by  the  corporation ; 
(2)  on  the  amount  required  for  the  development  of  the 
undertaking;  (3)  on  the  earning  power  of  the  corporate 
business;  (4)  on  the  speculative  estimate  of  what  these 
earning  powers  will  be  when  the  business  is  developed;  or 
( 5 )  on  some  combination  of  these  factors. 

The  statutory  requirements  as  to  issuance  of  capital 
stock  differ  in  the  various  states ;  but  some  minimum  is 
usually  fixed  by  law  as  the  smallest  amount  with  which  the 
corporation  may  begin  business.  Beyond  any  such  required 
amount,  the  capital  stock  need  only  be  issued  when  it 
is  necessary  to  secure  money  or  property  for  corporate 
purposes. 

In  a  conservative  company,  the  capital  stock  issued  at 
the  time  of  organization  will  usually  represent  dollar  for 


THE    CORPORATE    FORM  g 

dollar  the  amount  of  cash  or  its  equivalent  put  into  the 
company;  though  naturally,  thereafter  the  value  of  this 
stock — which  depends  upon  the  value  of  the  property 
of  the  company — will  vary  as  the  corporate  business  is 
profitable  or  otherwise.  In  a  speculative  company,  on  the 
contrary,  the  capital  stock  is  usually  issued  to  a  figure  far 
in  excess  of  the  existing  value  of  any  property  owned. 
Nevertheless,  if  the  company  is  successful,  the  value  of 
its  assets  may  reach  or  even  greatly  exceed  its  original 
capitalization.  ^ 

§  12.    Shares  of  Stock 

The  capital  stock  of  a  corporation  is  divided  into  equal 
parts  called  shares,  the  par  value  of  which  is  usually  $ioo, 
though  mining  corporations  are  commonly  organized  with 
shares  of  the  par  value  of  $i,  and  shares  of  the  par  value 
of  $io  are  frequently  encountered.  The  object  in  issuing 
these  small  shares  is  to  encourage  small  investors.  In  some 
states  the  par  value  of  shares  is  restricted  by  law,  but  in 
most  states  it  may  be  fixed  at  any  figure  desired.  Occa- 
sionally shares  are  issued  of  the  par  value  of  $500  or  even 
$1,000  each ;  but,  unless  there  is  good  reason  to  the  contrary, 
a  par  value  of  $100  should  be  adhered  to  on  account  of  its 
common  use  and  its  convenience. 

§  13.    Stockholders 

When  a  company  is  organized,  its  stock  Is  supposed 
to  be  issued  only  for  money,  property,  or  something  else 
of  value  contributed  to  the  company;  and  the  parties  who 
receive  the  stock  in  exchange  for  these  values,  and  those 
who  thereafter  acquire  it,  are  the  stockholders  and  compose 
the  company.  The  number  of  stockholders  in  a  corporation 
is  rarely  less  than  three.  On  the  other  hand,  the  stock- 
holders may  be  very  numerous;  thus  the  capital  stock  of 


lO  ORGANIZATION    AND    PROCEDURE 

the  Pennsylvania  Railroad  of  the  par  value  of  $500,000,000, 
is  owned  by  over  94,000  different  stockholders;  and  the 
United  States  Steel  Corporation,  with  its  billion  dollars  of 
stock  capital,  has  more  than  125,000  stockholders. 

When  all  the  stock  of  a  corporation  is  controlled  by  one 
person,  it  is  frequently  termed  a  "one-man  company";  or 
if  controlled  by  a  few  persons,  a  "close  corporation."  Such 
corporations  are  common. 

The  stock  of  a  corporation  may  be  freely  transferred  by 
sale  or  otherwise.  Such  transfers  do  not,  however,  affect 
the  existence  of  the  corporation,  which  continues  until 
terminated  by,  (i)  statutory  limitations ;  (2)  the  limitations 
of  the  charter;  (3)  by  consent  of  the  stockholders;  or  (4) 
by  action  of  creditors.  The  stockholders  of  a  corporation 
are  frequently  in  a  continual  state  of  change,  old  stock- 
holders going  out  and  new  ones  taking  their  places.  The 
ownership  of  the  corporation  is  thus  continually  changing, 
but  the  corporation  itself  is  the  same.  As  stated  by  Black- 
stone,  "A  corporation  is  like  to  the  river  Thames,  which  is 
still  the  same  river  though  the  parts  composing  it  are 
changing  every  instant." 

§  14.    Certificates  of  Stock 

The  interest  of  a  stockholder  in  a  corporation  is  fixed 
by  his  holdings  of  its  stock.  This  is  evidenced  by  proper 
entries  on  the  corporate  books  and  also  by  certificates  signed 
and  sealed  by  the  proper  officials  of  the  company,  stating 
the  number  of  shares  owned  by  the  individual  to  whom  the 
certificates  are  issued.  This  individual  is  then  the  "owner 
of  record."  If  he  sells  his  stock  he  assigns  his  certificates 
to  the  buyer,  who  then  surrenders  these  certificates  to  the 
corporation  and  receives  a  new  certificate  in  his  own  name, 
proper  entries  being  made  on  the  corporate  books  (§  61) 
to  show  the  new  owner  of  record. 


THE    CORPORATE    FORM  II 

All  stockholders  are  entitled  to  certificates  for  the  stock 
owned  by  them,  and  can  under  proper  conditions  force  the 
issue  of  such  certificates  if  withheld.  They  are  also  entitled, 
within  reasonable  limits,  to  have  their  certificates  broken 
up  and  reissued  if  they  so  desire.  To  curb  too  great  activity 
in  this  direction,  the  corporate  by-laws  sometimes  authorize 
the  secretary  to  charge  a  small  fee  for  each  certificate  issued 
by  him. 

While  the  stock  certificate  is  the  convenient  and  cus- 
tomary evidence  of  stock  ownership,  its  loss  or  destruction 
does  not  affect  this  ownership.  Such  loss  may,  it  is  true,  be 
very  embarrassing  to  the  stockholder,  just  as  would  be  the 
loss  of  a  deed  to  real  estate;  but  he  is  still  the  "owner  of 
record"  on  the  corporate  books,  and,  though  he  cannot 
produce  his  certificate,  is  a  stockholder  of  the  company, 
entitled  to  receive  his  dividends  and  to  be  present  and  vote 
at  stockholders'  meetings.  There  is,  however,  one  exception 
to  this  statement.  When  a  purchaser  receives  a  certificate 
assigned  to  him  by  the  seller,  and  has  not  yet  surrendered 
it  in  exchange  for  a  new  certificate  issued  to  himself,  its 
loss  is  far  more  serious.  The  seller,  and  not  the  purchaser, 
is  then  the  owner  of  record,  and  the  purchaser  has  no  stock- 
holder's rights.  His  only  recourse  in  case  of  loss  under 
such  circumstances  is  to  appeal  to  the  seller  and  to  the  cor- 
poration for  assistance  in  establishing  his  true  status.  This 
is  usually  very  difficult  to  establish. 

When  a  stockholder  who  has  lost  his  certificate  wishes 
to  sell  his  stock,  he  must  apply  to  the  corporation  for  a 
reissue;  for,  speaking  generally,  no  one  would  buy  stock 
without  a  transfer  of  the  certificate.  The  corjx)rate  by-laws 
almost  always  provide  for  such  reissues,  but  require  the 
party  to  whom  a  certificate  is  reissued  to  give  bond  to 
protect  the  corporation  in  case  the  original  certificate  should 
turn  up  to  its  injury. 


12  ORGANIZATION    AND    PROCEDURE 

§  15.    Voting 

Each  stockholder  in  a  corporation  is  ordinarily  entitled 
to  vote  at  every  stockholders'  meeting,  and  has  one  vote  for 
each  share  of  stock  standing  in  his  name  on  the  books.  In 
an  election  of  directors,  for  example,  he  may,  for  each  share 
of  stock  owned  by  him,  cast  one  vote  for  each  director  to 
be  elected.  Under  the  plan  known  as  "cumulative  voting," 
which  the  statutes  of  some  states  prescribe,  and  which  in 
many  other  states  may  be  obtained  by  charter  or  by-law 
provision,  each  share  of  stock  still  has  its  one  vote  for  each 
director  to  be  elected ;  but,  instead  of  casting  this  one  vote 
for  each  candidate,  the  stockholder  may  "cumulate"  all  his 
votes  upon  one  or  more  of  the  candidates,  as  he  sees  fit. 
Thus,  if  seven  directors  are  to  be  elected,  a  stockholder 
owning  one  share  of  stock  may,  under  the  cumulative  system, 
cast  seven  votes  for  one  candidate,  or  three  votes  for  one 
candidate  and  four  for  another ;  or  may  distribute  his  seven 
votes  among  all  the  candidates  as  he  sees  fit. 

This  method  of  voting  is  frequently  important  to  the 
interests  of  minority  stockholders.  Under  the  ordinary  plan 
they  cannot  possibly  secure  representation  on  the  board  of 
directors ;  but  with  cumulative  voting  they  can,  if  they  hold 
a  fair  proportion  of  the  stock,  elect  one  or  more  directors. 
Having  representation  on  the  board,  minority  stockholders 
are  enabled  to  secure  information  as  to  what  is  being  done, 
and  in  a  measure  can  protect  their  interests.     (See  §  41.) 

§  16.    Advantages  of  the  Corporate  Form 

The  corporation  as  a  form  of  business  organization  is 
superior  to  the  partnership  in  several  important  respects. 
A  partnership  may  be  formed  by  word  of  mouth,  by  simple 
agreement,  or  it  may  exist  by  implication  without  the  know- 
ledge of  the  partners.  It  is  conducted  with  the  same  easy 
simplicity.    Each  member  may  act  for  and  bind  the  partner- 


THE    CORPORATE    FORM 


13 


ship,  and  each  member  is  hable  for  all  the  debts  of  the  firm. 
In  suits  or  other  legal  proceedings  the  individual  members 
must  be  made  parties,  as  the  partnership  cannot  be  sued 
under  its  firm  name. 

A  corporation,  on  the  other  hand,  can  be  formed  only 
by  voluntary,  deliberate  intention  of  the  parties,  acting  in 
accordance  with  statute  laws.  The  management  is  vested 
in  directors,  who  must  act  as  a  body  and  in  accordance  with 
the  regulations  of  the  charter  and  by-laws.  After  a  stock- 
holder has  once  paid  for  his  stock,  he  is  not,  in  most  states, 
liable  further  for  the  debts  of  the  corporation.  The  corpora- 
tion itself  may  sue  and  be  sued,  and  act  generally  under  its 
own  name  as  an  individual. 

The  more  material  advantages  of  the  corporate  over  the 
partnership  form  of  business  organization  may  be  sum- 
marized as  follows : 

1.  The   limitation   of   stockholders'    liabilities   to   the 

amount  of  their  stock  (in  most  states). 

2.  The  distinct  legal  entity  of  the  corporation  for  all 

business  purposes. 

3.  The  stabiHty  and  permanence  of  the  corporate  or- 

ganization. 

4.  Transferable  shares  of  stock  to  represent  owner- 

ship in  the  corporation. 

5.  The  management  of  the  business  by  an  elected  board 

of  directors  acting  through  officers  and  agents. 

6.  The  greater    ease    of    securing   capital   under    the 

corporate  form  because  of  its  safety  and  its 
convenient  method  of  representing  ownership 
interests  by  stock. 

§  1 7.    Disadvantages  of  the  Corporate  Form 

While  the  corporation  is  the  best  form  of  business 
organization,  generally  speaking,  it  must  not  be  supposed 


H 


ORGANIZATION    AND    PROCEDURE 


that  it  offers  a  cure  for  all  business  ills,  or  is  a  safeguard 
against  all  loss.  Nor  should  it  be  supposed  that  the  partner- 
ship form  entails  all  the  disadvantages  to  which  business 
organizations  are  subject.  There  are  many  instances  of 
partnership  organizations  of  long  standing  under  which 
large  and  successful  businesses  have  been  built  up. 

Furthermore,  while  the  corporate  organization  possesses 
many  advantages,  it  has  also  its  points  of  disadvantage,  in 
the  restrictions  and  burdens  placed  upon  it  by  federal  and 
state  laws.  These  include  limitations  of  activity,  onerous 
taxation,  the  filing  of  many  reports,  and  the  publicity  of 
corporate  affairs.  There  is  a  strong  tendency  at  present  to 
extend  some  of  these  burdens  to  every  form  of  business 
organization,  but  the  corporate  form  is  still  distinctly  handi- 
capped in  this  respect. 

§  18.    Summary  of  Taxes  and  Reports 

The  following  summary  gives  the  more  important  taxes 
and  reports  required  of  corporations.  These  are  in  addition 
to  the  expenses  of  organization.  Some  of  the  taxes  and 
reports  mentioned  are  not  peculiar  to  the  corporation,  but 
are  given  for  the  sake  of  completeness. 

Taxes : 

1.  Organization  taxes  payable  to  the  state  for  incor- 

poration. 

2.  Annual  franchise  taxes  paid  to  the  state  of  incor- 

poration. 

3.  Annual  taxes  on  property. 

4.  Federal  income  tax. 

5.  Inheritance  tax  on  stock  (in  most  states). 

6.  Stock  transfer  tax  (in  New  York  State). 

7.  Taxes  and  license  fees  in  each  state — outside  the 

home  state — in  which  the  corporation  does  busi- 
ness. 


THE    CORPORATE    FORM 


15 


Reports : 

1.  Local  tax  reports. 

2.  State  tax  reports. 

3.  Federal  tax  reports. 

4.  Annual  and  other  reports  required  by  the  home 

state. 

5.  Reports  in  each  state — outside  the  home  state — in 

which  the  corporation  does  business. 

§  19.    The  Corporate  Records 

The  corporation  is  Uterally  a  creature  of  the  law ;  and, 
while  having  no  real  personal  existence,  is,  apart  from  its 
membership,  a  distinct  legal  entity,  with  many  of  the  powers, 
rights,  and  privileges  of  a  person.  Since  corporations  are 
creatures  of  the  law,  their  business  must  be  conducted  in 
compliance  with  the  law;  and  this,  as  well  as  their  distinc- 
tive form  and  method  of  action,  necessitates  various  instru- 
ments, records,  and  accounts  not  required  by  other  forms 
of  business  organization. 

Thus,  the  proceedings  at  meetings,  both  of  the  stock- 
holders and  of  the  board  of  directors,  must  be  recorded  in 
suitable  minute  books;  stock  certificates  must  be  issued, 
cancelled  and  reissued,  and  these  transactions  must  be 
recorded  in  stock  certificate  books  and  stock  ledgers ;  the 
distribution  of  profits  in  the  form  of  dividends  requires  a 
dividend  book,  and  the  issue  of  bonds  requires  a  bond 
register. 

In  addition  to  the  special  books  and  records  incident  to 
the  corporate  form,  corporations  also  require,  as  business 
organizations,  the  usual  accounting  books  and  records. 


CHAPTER    II 

KINDS    OF    STOCK 

§  20.    Capitalization 

The  term  "capitalization"  ordinarily  designates  the 
total  capital  stock  of  a  corporation,  whether  common  or 
preferred,  issued  or  unissued;  but  in  economic  discussions 
of  finance,  this  term  is  frequently  extended  to  include  not 
only  the  authorized  capital  stock,  but  also  bonds  and 
similar  corporate  obligations. 

§  21.    Capital  Stock  and  Actual  Capital 

Capital  stock  has  already  been  defined  (§  11),  but  may 
be  further  described  as  the  nominal  or  sliare  capital  of  a 
corporation,  as  distinguished  from  its  actual  or  property 
capital.  These  two  are  radically  different.  The  first  is 
fixed  by  the  charter,  while  the  second  is  the  net  value  of 
the  corporate  assets.  The  sole  effect  of  the  charter  pro- 
vision is  to  fix  the  amount  of  capital  stock  stated  therein 
as  the  authorized  maximum  capital  stock;  and,  while 
those  in  control  of  the  new  corporation  may  issue  stock 
up  to  this  amount,  they  may  not  exceed  it.  The  property 
capital  of  a  corporation  on  the  other  hand  depends  en- 
tirely upon  the  corporate  business  and  management.  If 
the  corporation  is  prosperous  and  if  dividends  are  not 
declared  too  freely,  its  capital  will  increase;  otherwise  it 
will  stand  still  or  diminish. 

The  actual  capital  of  a  corporation  is  usually  secured 
by  the  sale  and  issue  of  its  capital  stock.  In  most  states 
this  stock  may  be  issued  only  for  cash,  property,  or  labor, 

16 


KINDS    OF    STOCK 


17 


equal  at  least  to  the  nominal  value  of  the  issued  stock. 
Many  heavily  capitalized  incorporations  of  the  past  decade 
have,  by  various  subterfuges,  evaded  actual  compliance 
with  this  requirement,  but  the  present  tendency  towards 
a  stricter  enforcement  of  the  letter  of  the  law  is  making 
such  evasion  increasingly  difficult. 

When  capital  stock  is  issued  at  par  for  actual  value, 
it  follows  that  at  that  time  the  outstanding  capital  stock 
and  the  capital  secured  by  its  issue  are  equal.  For  ex- 
ample, if  a  corporation  organizes  with  a  capital  stock  of 
$50,000,  all  of  which  is  issued  for  money  or  property,  such 
money  or  property  should  represent  a  value  of  $50,000. 
The  capital  stock,  however,  remains  a  fixed  quantity 
unless  changed  by  formal  charter  amendment  or  by  legis- 
lative enactment,  while  the  actual  capital  changes  with 
every  variation  of  the  corporate  business. 

The  working  capital  of  a  corporation  is  usually  under- 
stood to  include  the  actual,  or  property,  capital  and  any 
money  borrowed  for  business  purposes. 

§  22.    Shares  Without  Par  Value 

In  191 2  a  law  was  passed  by  the  New  York  legislature 
granting  the  right,  where  special  application  is  made 
therefor,  to  organize  corporations  with  shares  of  unspeci- 
fied value.  In  such  cases,  each  share  of  unvalued  stock 
represents  an  equal  interest  in  the  corporation,  and  each 
certificate  is  required  to  have  written  or  printed  thereon 
the  number  of  unvalued  shares  represented  by  it,  as  well 
as  the  entire  number  of  such  shares  authorized. 

For  example,  if  a  corporation  is  organized  under  the 
unvalued  share  law,  say  with  500  shares,  each  share  would 
represent  a  1/500  interest  in  the  corporate  property  and 
business;  and  its  dollars  and  cents  value  could  be  de- 
termined after  a  valuation  of  the  corporate  property  and 


l8  ORGANIZATION    AND    PROCEDURE 

business,  by  dividing  such  value  by  500.  Thus,  if  the 
estimated  value  of  capital  and  surplus  owned  by  the  cor- 
poration were  $45,500,  each  share  would,  in  the  absence  of 
other  modifying  conditions,  be  worth  $91.*     (See  §  80.) 

§  23.    The  Functions  of  Corporate  Stock 

The  most  important  function  of  corporate  stock  is  to 
indicate  the  stockholders'  interests  in  the  corporation's 
business.  It  does  not  give  the  individual  owner,  or  stock- 
holder, a  right  to  any  part  of  the  corporate  capital,  except 
in  case  of  liquidation;  but  it  represents  his  proportionate 
part  of  any  profits  declared  as  dividends,  and  also  shows 
to  what  representation  he  is  entitled  in  any  meetings  of 
the  stockholders. 

The  division  of  capital  stock  into  shares  enables  the 
interest  of  each  stockholder  to  be  indicated  with  accuracy, 
and  also  permits  the  transfer  of  this  interest  with  an  ease 
not  found  under  any  other  system  of  business  organization. 

§  24.    Nature  of  Stock 

From  the  standpoint  of  the  accountant,  the  capital 
stock  represents  an  indebtedness  of  the  corporation,  and 
in  practice  is  entered  as  a  liability  on  the  corporate  books 
and  in  all  statements  of  corporate  affairs.  There  is,  how- 
ever, a  clear  distinction  between  the  corporate  liability  on 
such  things  as  notes,  bonds,  outstanding  current  indebted- 
ness, etc.,  and  the  technical  liability  for  corporate  stock. 
No  interest  is  paid  on  capital  stock,  nor  does  the  corpora- 
tion undertake  to  "pay  it  out";  and  its  value,  whether 
face  or  actual,  cannot  be  collected  from  the  corporation 
by  legal  procedure.  Therefore  it  is  not,  from  any  point 
of  view,  a  legal  corporate  liability.  It  is  only  a  technical 
liability,  and  does  not  afifect  the  solvency  of  the  corpora- 

•For  further  details  see  Conyngton's  "Corporate  Organization." 


KINDS    OF    STOCK 


19 


tion  in  any  way.  A  corporation  may  be  not  only  solvent 
but  highly  prosperous  at  a  time  when  its  actual  assets  are 
materially  less  than  the  face  value  of  its  outstanding 
stock. 

The  capital  stock  of  a  corporation,  or  the  assets  ob- 
tained from  its  sale,  are  regarded  in  law  as  a  trust  fund 
pledged  for  the  payment  of  the  corporate  debts.  It  is  the 
foundation  upon  which  the  corporation's  credit  is  based. 
Hence,  both  the  common  and  the  statute  law  are  insistent 
that  no  dividends  shall  be  declared  which  may  impair  the 
capital  stock  or  endanger  the  solvency  of  the  corporation. 

§  25.    Issued  and  Unissued  Stock 

A  corporation  is  under  no  obligation  to  issue  the  full 
amount  of  its  authorized  capital  stock.  On  the  contrary, 
after  complying  with  any  statutory  requirements  as  to  the 
minimum  issue,  it  may  do  whatever  seems  best  with  the 
balance  of  its  stock,  allowing  it  to  remain  unissued  or 
issuing  it  from  time  to  time  as  may  be  necessary  or 
expedient.  All  *'issued  stock"  which  has  not  in  some  way 
come  back  into .  the  possession  of  the  corporation,  is 
termed  "outstanding  stock." 

Any  stock  that  has  not  been  issued  is  termed  "unissued 
stock,"  or  sometimes  loosely  and  erroneously  called 
"treasury  stock."  (See  §  2^^  Stock  on  its  first  issue  by 
the  corporation  at  its  organization  or  later,  is  termed  an 
"original  issue"  to  distinguish  it  from  stock  issued  on 
transfers  of  certificates,  or  from  treasury  stock,  etc. 
Unissued  stock  has  in  itself  no  value,  and  can  neither  be 
voted  nor  participate  in  dividends.  It  is  nothing  more 
than  a  right  to  issue  stock. 

§  26.    Full-Paid  and  Partly  Paid  Stock 

A  corporation  may  sell  its  stock  for  any  fair  price,  and 


20  ORGANIZATION    AND    PROCEDURE 

when  this  price  is  paid  it  has  no  further  claim  against  the 
purchaser.  li,  however,  this  agreed  price  is  less  than  the 
face  value  of  the  stock,  such  stock  is  not  full-paid;  and 
should  the  corporation  later  become  insolvent,  its  creditors 
could  force  the  original  purchasers  of  the  stock — if  it  were 
still  in  their  hands — to  pay  the  difference  between  the  pur- 
chase price  and  the  par  value,  or  so  much  thereof  as  might 
be  necessary  to  discharge  the  corporate  obligations.  Also, 
if  stock  is  sold  at  its  full  face  value  payable  in  instalments, 
and  these  have  not  all  been  paid,  the  purchasers  are  liable 
to  the  corporation  or  to  its  creditors  for  the  balance  due. 

If,  however,  a  corporation  has  once  received  value  in 
cash,  property,  or  services,  up  to  the  face  or  par  value  of 
the  stock  issued  therefor,  such  stock  is  termed  full-paid. 
Then,  barring  the  stock  of  institutions  such  as  banks  and 
trust  companies,  which  are  subject  to  special  liabilities,  the 
parties  acquiring  such  stock  are  not  further  liable  either  to 
the  corporation  or  to  the  corporate  creditors,  even  though 
the  former  should  fail  and  be  unable  to  pay  the  amounts 
due  its  creditors. 

The  question  as  to  the  full  payment  of  stock  frequently 
comes  up  in  connection  with  its  issue  for  property.  If  the 
value  of  property,  or  of  other  considerations  given  for  stock, 
is  not  equal  to  the  face  value  of  the  stock,  the  stock  is  not 
full-paid;  and  the  corporate  creditors  may  force  payment 
of  the  deficiency,  provided  the  stock  is  still  in  the  hands  of 
the  original  purchasers. 

This  disquieting  liability  of  partly  paid  stock  is  avoided 
in  conservative  corporations  by  issuing  stock  only  in  ex- 
change for  its  full  par  value  in  money,  property,  or  labor; 
while  in  speculative  corporations  this  object  is  attained  by 
issuing  the  stock  in  exchange  for  more  or  less  indeterminate 
property  values,  optimistically  estimated  to  be  equal  to  the 
face  value  of  the  stock.    In  former  years,  if  there  was  any 


KINDS    OF    STOCK  21 

colorable  payment  for  stock  the  courts  were  inclined  to  hold 
such  stock  full-paid;  but  now,  owing  to  a  change  of  senti- 
ment, the  payment  for  stock  is  scrutinized  carefully,  and 
it  must  be  of  fairly  equivalent  value  if  liability  is  to  be 
escaped. 

The  liability  on  partly  paid  stock  follows  it  into  the 
hands  of  subsequent  purchasers  if  they  take  the  stock  with 
knowledge  of  the  conditions.  However,  if  the  stock  is 
marked  "full-paid"  and  is  sold  to  an  innocent  purchaser  for 
value,  he  is  not  further  liable ;  nor,  unless  so  provided  by 
statute,  does  any  liability  remain  with  the  seller. 

§  27.    Treasury  Stock — Donated  Stock 

The  term  "treasury  stock"  is  often  applied  to  unissued 
stock  (§  25)  on  the  assumption  that  such  stock  is  held  in 
the  treasury  to  be  issued  as  required ;  but  the  term  is  more 
appropriately  used  to  designate  outstanding  stock  which 
has,  by  purchase  or  otherwise,  been  acquired  by  the  cor- 
poration and  is  held  subject  to  disposal  by  the  directors. 

In  speculative  corporations  the  entire  capital  stock  is 
usually  issued  for  property,  and  becomes,  technically  at 
least,  "full-paid."  This  leaves  the  corporation  without 
working  capital  or  any  means  of  securing  it.  To  meet  this 
condition,  those  to  whom  the  stock  is  issued  usually  return 
an  agreed  part  of  this  stock  to  the  corporation — ostensibly 
as  a  donation — to  be  used  for  corporate  purposes.  This 
"donated  stock"  then  becomes  treasury  stock  and  may  be 
disposed  of  by  the  directors ;  and,  if  the  payment  was  one 
which  will  stand  legal  scrutiny,  it  may  be  sold  for  less  than 
its  par  value  without  subjecting  the  purchaser  to  the  liabili- 
ties incident  to  partly  paid  stock. 

When  the  preferred  stock  of  a  corporation  is  sold,  It  is 
not  uncommon  to  offer  with  it  a  bonus  of  common  stock, 
which,  to  be  attractive,  must  be  "full-paid  and  non-assess- 


22  ORGANIZATION    AND    PROCEDURE 

able."  The  corporation  must  then  have  for  this  purpose  a 
supply  of  full-paid  common  stock,  and  this  supply  usually 
consists  of  donated  stock  as  already  described.  In  the 
ordinary  corporation  any  full-paid  stock  is  non-assessable. 

From  the  accounting  standpoint,  treasury  stock  is  an 
asset  of  the  corporation;  although  it  differs  from  unissued 
stock  only  in  the  fact  that  it  has  once  been  issued  and  may 
be  sold  at  less  than  par  without  involving  the  purchaser  in 
liability. 

Stock  so  acquired,  or  acquired  in  any  other  way  by  a 
corporation,  is  usually  held  in  the  corporate  name,  though 
occasionally  it  is  assigned  to  the  treasurer  or  to  a  trustee. 
When  it  is  to  be  held  in  the  corporate  name,  the  incoming 
certificates  are  cancelled,  and  the  proper  entries  are  made 
in  the  stock  book  to  show  that  the  stock  has  been  trans- 
ferred to  the  corporation.  It  is  not  necessary,  however,  to 
issue  new  certificates  so  long  as  such  stock  is  held  in  the 
treasury;  but  when  sold,  a  new  certificate  is  issued  to  the 
purchaser. 

When  its  own  stock  is  owned  or  held  by  the  corporation, 
this  stock  can  neither  vote  nor  draw  dividends. 

§  28.    Common  and  Preferred  Stock 

When  all  the  stock  of  a  corporation  is  on  an  absolute 
equality,  it  is  known  as  "common  stock."  No  one  stock- 
holder then  has  any  rights  over  any  other  stockholder,  and 
no  one  share  of  stock  has  any  advantage  over  any  other 
share. 

If,  however,  by  proper  procedure — usually  by  charter 
provision — some  of  the  stock  has  been  given  rights  as  to 
dividends  or  assets  not  enjoyed  by  the  other  stock  of  the 
corporation,  such  stock  is  "preferred  stock"  as  opposed  to 
the  remaining  or  "common  stock." 

Preferred  stock  can  be  created  by  proper  procedure  in 


KINDS    OF    STOCK  2^ 

any  state  of  the  Union.  In  some  states  it  is  created  by- 
charter  provision;  in  others,  through  by-law  enactment,  or 
by  direct  and  unanimous  action  of  the  stockholders. 

Speaking  generally,  preferred  stock,  in  addition  to  its 
preferential  rights,  has  all  the  rights  and  liabilities  of  com- 
mon stock.  In  other  words,  preferred  stock  loses  none  of 
the  rights  of  common  stock  by  reason  of  its  preference,  un- 
less such  rights  are  expressly  denied  or  restricted  by  the 
same  authority  that  created  its  preferential  rights.  The 
entire  trend  of  modern  decisions  involving  preferred  stock 
is  to  consider  it  as  merely  common  stock  with  certain  speci- 
fied additional  privileges. 

As  already  stated,  stock  is  not  a  real  but  only  a  secondary 
liability  of  the  corporation;  and  unless  otherwise  expressly 
provided  by  statute,  this  is  equally  true  of  preferred  stock 
and  also  of  its  preferred  dividend.  Such  preferred  dividend, 
or  interest  as  it  is  sometimes  incorrectly  called,  may  be  paid 
only  out  of  profits,  and  is  not  a  debt  of  the  corporation  until 
such  profits  have  been  earned  and  declared  as  dividends. 

As  to  the  form  of  preferred  stock,  different  classes  may 
be  created  by  the  same  corporation;  one  class  may  receive 
its  dividends  before  the  second,  the  second  before  the 
third,  and  both  these  may  receive  their  dividends  in  any 
year  before  the  common  stock  receives  any  dividend  at  all. 
These  several  classes  may  have  different  dividend  rights, 
one  receiving  perhaps  5%  and  another  6%.  Sometimes  the 
amount  of  preferred  dividend  will  be  made  contingent  upon 
the  amount  of  profits ;  or  the  corporate  income  from  particu- 
lar sources  may  be  designated  for  payment  of  preferred 
dividends;  or  preferred  stock  may  be  given  preference  in 
the  distribution  of  assets,  or  other  special  redemption  fea- 
tures may  be  given,  or  it  may  be  made  convertible  into 
common  stock  under  prescribed  conditions.      (See  §   30.) 

On  the  other  hand,  privileges  or  riR:hts  may  be  denied. 


24  ORGANIZATION    AND    PROCEDURE 

Thus,  preferred  stock  may  be  denied  the  voting  right,  or 
else  permitted  to  vote  only  under  certain  conditions.  Divi- 
dends may  be  made  non-cumulative,  or  such  stock  may  be 
strictly  limited  to  the  preferential  dividend.  Preferred  stock 
is  held  to  be  cumulative  as  to  dividends  unless  it  is  specified 
that  it  shall  be  non-cumulative.     (See  §  29.) 

The  usual  reason  for  the  issue  of  preferred  stock  is  to 
provide  a  corporate  security  which  can  be  sold  more  readily 
"than  the  common  stock.  Its  numerous  possible  variations, 
however,  render  it  available  for  many  different  purposes. 
Thus,  preferred  stock  is  frequently  issued  to  represent  or 
pay  for  the  actual  property  assets  taken  over  by  a  new 
corporation,  while  common  stock  is  issued  to  represent  the 
good-will  and  other  intangible  assets.  Or,  when  a  partner- 
ship is  incorporated,  the  excess  investment  of  one  partner 
is  frequently  represented  by  an  issue  of  non-voting  preferred 
stock,  while  the  interest  of  the  silent  partner  is  conveniently 
cared  for  by  the  same  means.  In  a  consolidation  of  proper- 
ties, the  interests  of  those  concerned  are  equitably  adjusted 
with  the  help  of  preferred  stock. 

From  the  standpoint  of  the  corporation,  preferred  stock 
is  usually  more  desirable  than  bonds  as  a  means  of  raising 
money.  It  does  not  become  a  debt  either  as  to  dividends  or 
principal.  Unless  the  stock  is  redeemable,  the  principal  is 
never  due.  The  dividend  is  paid  if  profits  exist  for  its  pay- 
ment ;  but,  if  the  dividend  is  not  paid  in  any  year,  it  merely 
passes  over  to  succeeding  years  if  cumulative,  or  expires  if 
non-cumulative.  In  any  event,  it  Is  only  a  claim  against 
profits.  Bonds,  on  the  other  hand,  are  an  absolute  obliga- 
tion both  as  to  interest  and  principal.  If  the  interest  is  not 
paid  when  due,  it  may  be  collected  by  legal  proceedings,  and 
frequently  default  in  interest  has  the  effect  of  maturing  the 
bond  and  thereby  rendering  payment  of  both  principal  and 
interest  imperative.    In  any  event,  the  bond  must  be  paid  at 


KINDS    OF    STOCK 


25 


maturity  under  penalty  of  foreclosure,  regardless  of  the 
condition  of  the  corporate  finances. 

§  29.    Dividends  on  Preferred  Stock 

Dividends  on  preferred  stock  are  either  cumulative  or 
non-cumulative.  A  cumulative  dividend  is  one  which,  if  not 
paid  in  any  year,  becomes  a  charge  against  the  future  cor- 
porate profits,  and  cumulates  from  year  to  year  until  paid. 
A  non-cumulative  dividend  is  one  which  is  a  first  charge  on 
any  profits  declared  as  dividends  in  that  particular  year, 
but,  if  no  dividends  are  paijd  in  that  year,  does  not  continue 
as  a  charge  against  the  profits  of  following  years. 

Where  cumulative  preferred  stock  exists,  no  dividends 
may  be  paid  upon  the  common  stock  in  any  year  until  the 
preferred  dividend  for  that  year  has  been  paid  in  full, 
together  with  any  preferred  dividends  not  paid  in  preceding 
years.  Thus,  if  preferred  stock  bears  a  6%  cumulative 
dividend  and  no  dividends  are  paid  the  first  year,  the  com- 
mon stock  cannot  receive  any  dividends  in  the  second  year 
until  the  preferred  stock  has  received  a  12%  dividend.  If 
no  dividends  are  paid  in  the  second  year,  the  preferred  stock 
must  receive  a  full -18%  in  the  third  year  before  the  common 
stock  may  receive  any  dividend. 

It  is  obvious  that  a  cumulative  dividend  is  the  more 
advantageous  to  the  holder  of  preferred  stock.  In  fact, 
non-cumulative  preferred  stock  offers  a  temptation  to  the 
directors  interested  in  the  common  stock,  to  pass  dividends. 
Thus,  if  in  any  year  sufficient  profits  exist  from  which  the 
preferred  dividends  might  be  paid,  but  the  directors  refuse 
to  declare  dividends  until  the  following  year,  the  preferred 
dividend  that  might  have  been  paid  in  the  preceding  year  is 
lost  absolutely  to  the  preferred  stockholders  and  its  amount 
is  saved  to  the  corporation  and  may  be  declared  as  dividends 
the  next  year  or  at  some  later  time  at  the  discretion  of  the 


26  ORGANIZATION    AND    PROCEDURE 

directors.  In  these  dividends  from  held-over  profits,  the 
preferred  stock  will  participate  only  to  the  amount  of  its 
preferred  dividend  for  that  single  year,  the  entire  remainder 
of  the  dividends  declared  going  to  the  common  stock. 

When  it  is  not  specified  that  preferred  stock  shall  be 
non-cumulative,  it  is  held  to  be  cumulative. 

§  30.    Convertible  Stock 

Preferred  stock,  in  order  to  make  it  more  salable,  is 
sometimes  issued  with  the  right  of  exchange  for  common 
stock,  either  at  some  specified  time  or  within  a  specified 
period ;  the  terms  of  exchange  being  prescribed  and  usually 
appearing  upon  the  face  of  the  certificate.  When  preferred 
stock  is  non-participating,  i.e.,  does  not  participate  in  profits 
beyond  its  preferential  dividends,  the  convertible  privilege 
adds  materially  to  its  attractiveness.  Its  preference  as  to 
dividends — and  as  to  assets  if  this  also  belongs  to  it — gives 
it  a  safety  and  an  assurance  of  annual  returns  that  is  not 
characteristic  of  common  stock,  while  the  convertible  fea- 
ture gives  an  opportunity  for  an  advantageous  exchange  for 
common  stock  if  the  corporation  is  so  prosperous  as  to  make  v' 
this  exchange  desirable.  In  other  words,  the  convertible 
stock  offers  the  safety  of  preferred  stock  with  the  speculative 
possibilities  of  common  stock. 

Sometimes  this  convertible  feature  exists  between  pre- 
ferred stock  and  bonds,  as  in  the  case  of  the  United  States 
Steel  Corporation's  7%  preferred  stock,  which  is  exchange- 
able for  its  5%  bonds.  Any  such  exchange  of  stock  for 
bonds  or  agreement  for  such  exchange  would  usually  be 
illegal.  In  effect  it  amounts  to  a  corporation's  borrowing 
money  to  buy  its  own  stock.  The  exchange  in  the  case  of 
the  United  States  Steel  Corporation  was  made  pursuant  to 
provisions  of  a  special  enactment  of  the  New  Jersey  legis- 
lature, and  a  large  amount  of  preferred  stock  was  replaced 


KINDS     OF    STOCK  27 

by  the  bonds;  the  exchange  converting  a  7%   cumulative 
dividend  into  a  5%  interest  obUgation. 

When  preferred  stock  is  convertible  into  common  stock 
the  corporation  must  make  provision  for  the  exchange,  re- 
serving unissued  stock,  or  purchasing  its  outstanding  stock, 
or  perhaps  increasing  its  capital  stock  sufficiently  to  meet 
the  requirements  of  the  exchange. 

§  31,    Guaranteed  Stock 

The  term  "guaranteed  stock"  is  sometimes  applied  to 
preferred  stock,  and  in  such  case  usually  designates  a  stock 
on  which  the  dividends  are  guaranteed  by  the  terms  of  the 
creating  provision.  There  is  no  special  virtue  in  the  ex- 
pression or  in  the  stock,  as  it  is  held  ordinarily  to  be  merely 
cumulative  preferred  stock.  In  spite  of  the  statement  of 
the  creating  provision  that  the  dividend  is  guaranteed,  such 
dividend  can  be  paid  out  of  profits  only,  and  if  no  profits 
exist  it  is  in  no  way  a  debt  of  the  corporation.  Any  unpaid 
dividends  merely  pass  over  and  cumulate  as  a  charge  against 
profits. 

The  usual  and  better  application  of  the  term  "guaranteed 
stock"  is  to  stock  which,  as  to  dividend  or  principal,  or  both, 
has  been  actually  guaranteed  by  some  person,  concern,  or 
corporation  other  than  the  issuing  corporation.  Such  stock 
is  frequently  created  when  a  railroad  takes  over  a  subsidiary 
line,  and  guarantees  either  dividends  or  principal,  or  both, 
on  the  stock  of  the  absorbed  road.  The  dividend  on  the 
guaranteed  stock  then  becomes  an  actual  obligation  of  the 
guaranteeing  company,  which  must  be  met  when  due  just 
as  in  the  case  of  any  other  interest  or  obligation. 

§  32.    Watered  Stock 

"Watered  stock"  is  merely  a  term  used  to  designate  any 
fictitiously  paid-up  stock;  that  is,  "stock  which  is  issued  as 


28  ORGANIZATION    AND    PROCEDURE 

fully  paid-up  stock,  when  in  fact  the  whole  amount  of  the 
par  value  thereof  has  not  been  paid  in.  All  stock  which  has 
been  issued  as  paid-up  stock,  but  the  full  par  value  of  which 
has  not  been  paid  into  the  corporation  in  money  or  money's 
worth,  is  watered  to  the  extent  that  the  par  value  exceeds 
the  value  actually  paid  in.  Watered  stock  is,  accordingly, 
stock  which  purports  to  represent,  but  does  not  represent,  in 
good  faith,  money  paid  into  the  treasury  of  the  company, 
or  money's  worth  actually  contributed  to  the  capital  of  the 
concern."* 

Watered  stock  arises  from  many  conditions.  In  specula- 
tive corporations  the  stock  is  usually  issued  in  exchange  for 
property  at  enormously  inflated  values.  A  railroad,  the 
issued  stock  of  which  is  perhaps  already  in  excess  of  the 
real  value  of  its  property,  finds  its  dividends  so  uncom- 
fortably large  as  to  attract  public  attention.  Then,  entirely 
regardless  of  the  real  values  behind  its  stock,  it  will  add  a 
few  millions  to  its  capitalization  and  "cut  a  melon"  for  the 
benefit  of  its  stockholders.  Or,  in  a  combination  of  produc- 
ing properties,  preferred  stock  w'ill  be  issued  for  the  actual 
property  values,  and  common  stock  be  issued  in  addition  up 
to  the  full  measure  of  the  earning  power  of  the  combina- 
tion. Thus,  if  a  combination  is  formed  of  properties  of 
the  actual  value  of,  say,  $5,ocxd,ooo,  with  estimated  net 
profits  of  $600,000,  the  combination  can  pay  a  6%  divi- 
dend on  a  capitalization  of  $10,000,000.  $5,000,000  face 
value  of  preferred  stock  is  then  issued  for  the  properties, 
and  an  equal  amount  of  common  stock  is  issued  against  the 
good-will  or  earning  power  of  the  corporation.  This  is 
obviously  watered  stock. 

The  expression  "watered  stock"  is  usually  a  term  of 
reproach,  but  it  is  clear  that  under  some  circumstances  such 
stock  is  justifiable.    A  going  concern  may  be  incorporated. 

•Cook  on  Corporations,  §  28. 


KINDS    OF    STOCK  29 

The  value  of  its  property  is  $50,000;  and  its  record,  based 
on  its  earnings  for  a  number  of  years,  shows  that  it  can  pay 
dividends  on  a  capitahzation  of  $75,000.  $25,000  of  stock 
is  therefore  added  to  the  property  values,  making  the  total 
capitalization  of  the  concern  $75,000.  The  $25,000  of  stock 
issued  in  excess  of  the  property  value  is  technically  watered 
stock,  but  no  one  will  contend  that  it  is  not  a  justifiable  and 
entirely  proper  issue. 

Watered  stock  that  is  to  be  condemned  is  found  when 
capitalizations  are  increased  far  beyond  the  value  of  the 
property  and  beyond  any  earning  power  possessed  by  the 
corporation. 


CHAPTER    III 

MEETINGS;    THE    CORPORATE    CALENDAR 

§  33.    The  Annual  Meeting 

The  annual  meeting  of  stockholders  is  their  only  regular 
meeting,  i.e.,  one  of  which  the  date  and  the  general  nature 
are  fixed  by  the  by-laws,  and  at  which  any  ordinary  cor- 
porate business  may  be  transacted  without  special  mention 
in  the  notice  of  the  meeting.  All  other  stockholders'  meet- 
ings are  special  meetings,  assembled  as  the  necessity  arises 
for  the  transaction  of  special  business  which  must  be  speci- 
fied in  the  notice  of  the  meeting. 

Certain  matters  relating  to,  or  to  be  done  at,  the  annual 
meeting  are  prescribed  by  statute  in  many  states ;  and  these 
statutory  requirements  are,  together  with  other  matters  of 
procedure,  usually  set  forth  ag^in  in  the  by-laws  of  the  com- 
pany. The  more  common  matters  of  statutory  and  by-law 
regulation  are :  the  place  of  meeting ;  requirements  as  to  its 
notice ;  the  closing  of  the  stock  books ;  the  preparation  of 
a  list  of  stockholders  for  use  at  the  meeting ;  the  formalities 
incident  to  the  election  of  directors;  the  reports  to  be  pre- 
sented ;  etc. 

Considerable  laxity  in  the  formalities  of  the  annual 
meeting  usually  obtains  in  the  smaller  corporations.  Not 
infrequently,  where  the  stockholders  of  the  corporation  are 
few  and  all  are  officers  of  the  corporation  or  are  actively 
engaged  in  its  business,  the  election  of  directors  and  even 
the  annual  meeting  itself  are  dispensed  with,  the  existing 
board  of  directors  continuing  in  office  until  a  new  board  is 
elected.      Such  laxness,   while   permissible   where   all   the 

30 


/ 


MEETINGS  31 

stockholders  concur,  is  to  be  deprecated.  It  is  better  that 
everything"  pertaining-  to  corporate  management  should  be 
carried  out  in  strict  accordance  with  the  statutory,  charter, 
and  by-law  requirements. 

§  34.    Time  of  Annual  Meeting 

Corporations  usually  hold  the  annual  stockholders'  meet- 
ing shortly  after  the  close  of  their  fiscal  year,  which  may 
or  may  not  coincide  with  the  calendar  year.  Usually,  it  is 
preferable  to  have  the  fiscal  year  close"  with  the  31st  of 
December,  but  conditions  sometimes  exist  which  make  it 
advantageous  to  fix  the  date  otherwise,  as  for  instance  at  a 
time  when  business  is  slack  and  the  stock  of  goods  low.  It 
is  easier  at  such  times  to  take  inventories,  close  books,  and 
prepare  reports;  also  plans  and  policies  for  the  succeeding 
year  may  be  mapped  out  then  without  the  serious  interrup- 
tions to  the  immediate  business  activities  that  would  occur 
if  the  fiscal  year  closed  at  a  busier  time. 

The  annual  meeting  should  not  be  held  too  closely  after 
the  end  of  the  fiscal  year.  If  the  fiscal  year  ends  December 
31,  the  annual  meeting-  of  stockholders  might  be  held  during- 
the  second  or  third  week  in  January,  so  as  to  give  ample 
time  to  close  and  audit  the  books,  prepare  financial  state- 
ments, and  compile  the  other  data  needed  for  the  annual 
reports. 

The  time  of  the  annual  meeting-  is  prescribed  in  the 
by-laws. 

§  35.    Preliminary  Arrangements  for  Annual  Meeting 

In  arranging  for  the  annual  meeting  certain  formalities, 
usually  prescribed  by  the  by-laws,  must  be  observed,  such 
as  the  due  notification  of  stockholders,  the  closing  of  transfer 
books,  etc.  Some  of  these  are  statutory  requirements.  It 
is  the  secretary's  duty  to  carry  out  most  of  these  preliminary 


32  ORGANIZATION    AND    PROCEDURE 

requirements  of  the  meeting,  and  at  the  time  of  the  meeting 
to  see  that  everything  needed  is  ready  and  accessible. 

§  36.    Annual  Meeting — Closing  Transfer  Books 

The  "closing"  of  the  transfer  books  means  nothing  more 
than  that  the  officer  in  charge  of  the  books  in  which  the 
transfers  of  stock  are  recorded  refuses  to  make  entries  in 
them  during  the  period  they  are  closed.  Stock  may  be 
bought  and  sold  just  as  before,  these  transfers  being 
evidenced  by  the  properly  assigned  certificates,  but  such 
transfers  cannot  be  recorded  on  the  books  of  the  corpora- 
tion, nor  will  new  certificates  be  issued  until  the  books  are 
"opened"  for  transfers. 

The  by-laws  of  most  corporations,  especially  of  those 
whose  stocks  are  listed  on  exchanges,  specify  that  the 
transfer  books  shall  be  closed  a  stated  number  of  days  before 
the  annual  meeting.  Notice  must  be  given  by  the  secretary 
before  the  time  of  closing.  All  stockholders  of  record,  i.e., 
those  whose  stock  ownership  is  of  record  on  the  corpora- 
tion's books  on  the  date  of  closing,  are  entitled  to  participate 
in  and  vote  at  the  annual  meeting.  No  other  persons  are  so 
privileged,  unless  they  hold  proxies  from  stockholders  of 
record. 

The  object  of  closing  the  books  is  to  give  the  secretary 
opportunity  to  give  due  notice  of  and  make  his  preparations 
for  the  meeting;  also  to  prevent  any  sudden  or  unforeseen 
transfer  of  stock  with  a  view  of  controlUng  the  election.  In 
small  corporations,  where  the  stock  is  not  active,  the  closing 
of  the  stock  book  before  the  annual  meeting  is  not  usual. 
(See  §  62.) 

§    37.      Annual    Meeting  —  Stockholders'    List;    Notices; 
Proxies 

The  statutes,  and  the  by-laws  as  well,  usually  require 


MEETINGS 


33 


that  an  alphabetical  list  of  stockholders  be  prepared  for 
inspection  and  for  use  at  the  annual  meeting.  This  list  is 
prepared  by  the  secretary  after  the  transfer  books  are  closed, 
and  shows  the  persons  who  are  stockholders  of  record  and 
entitled  to  be  present  and  vote  at  the  meeting.  Whether 
required  or  not,  it  should  be  on  hand  for  reference  at  the 
meeting  and  should  be  open  to  the  inspection  of  any  stock- 
holder. 

Notice  of  the  annual  meeting  should  be  given  to  all 
stockholders  of  record,  either  by  letter  or  by  advertisement 
in  the  newspapers.  The  by-laws  usually  prescribe  the  method 
of  notification  and  the  number  of  days  prior  to  the  meeting 
that  notice  shall  be  given,  and,  when  the  notice  is  by  letter, 
sometimes  require  that  these  letters  shall  be  registered  to 
insure  safe  delivery.  The  notice  of  meeting  gives  the  dates 
for  the  closing  and  the  opening  of  the  transfer  books. 
Copies  of  papers  in  which  the  advertisement  appears  should 
be  carefully  preserved  by  the  secretary  as  a  matter  of 
record. 

The  notices  sent  out  to  the  stockholders  usually  contain 
printed  proxy  forms.  Stockholders  unable  to  be  present  in 
person  are  asked  to  sign  and  send  in  these  proxies,  which 
authorize  some  person — usually  the  secretary  of  the  com- 
pany— ^to  vote  their  shares.  By  this  means  a  quorum — 
which  is  necessary  for  the  transaction  of  business — is  some- 
times secured  when  otherwise  it  could  not  be  done.  Also, 
at  times  these  proxies  enable  the  directors  in  office  to  retain 
their  positions.     (See  Appendix,  Form  5.) 

§  38.    Annual  Meeting — Quorum 

A  quorum  at  a  stockholders'  meeting,  i.e.,  the  number 
of  shares  of  stock  which  must  be  represented  in  person  or  by 
proxy  before  business  can  be  legally  transacted,  is  ordinarily 
stated  in  and  fixed  by  the  by-laws.    The  usual  requirement 


34  ORGANIZATION    AND    PROCEDURE 

is  a  majority  of  the  outstanding  stock,  except  at  those  meet- 
ings where  some  special  action  is  to  be  taken  or  where  for 
other  reasons  the  amount  or  proportion  of  stock  to  con- 
stitute a  quorum  is  fixed  by  the  state  statutes.  Thus  an 
amendment  of  the  charter  usually  requires  the  action  of 
more  than  a  mere  majority  of  the  stock  and  in  New  York 
the  statutes  contain  the  very  unusual  provision  that  what- 
ever amount  of  stock  is  present  at  a  properly  assembled 
annual  meeting  constitutes  a  quorum,  and  may  elect  directors 
and  transact  any  other  business  properly  before  the  meeting. 
The  number  of  persons  present  at  a  meeting  is  of  no  im- 
portance. One  person  may  by  ownership  of  stock  or  by 
proxy,  or  both,  represent  a  controlling  interest  or  even  the 
entire  stock;  and  such  a  meeting  if  properly  conducted  is 
legal,  though  in  England  and  Canada  it  has  been  held  that 
it  takes  at  least  two  to  hold  a  meeting. 

It  is  the  secretary's  duty,  in  calling  the  roll,  to  note 
whether  or  not  a  quorum  is  present  and  to  report  the  fact 
to  the  president.  No  business  can  be  transacted  if  a  quorum 
is  not  present.  If  a  quorum  is  present  the  fact  should  appear 
in  the  minutes. 

§  39.    Annual  Meeting — Opening  Formalities 

If  the  by-laws  so  provide,  the  president  and  secretary  of 
the  company  act  in  their  official  capacities  at  the  annual 
meeting;  if  not,  the  president  must  call  the  meeting  to 
order  and  the  stockholders  at  once  elect  a  chairman.  A 
secretary  of  the  meeting  is  then  either  appointed  by  the 
chairman  or  by  vote  of  the  members  present.  After  the 
chairman  and  secretary  have  been  elected,  the  secretary, 
upon  request  of  the  chairman,  calls  the  roll. 

After  the  roll  call,  a  copy  of  the  notice  of  the  meeting 
as  sent  to  the  stockholders,  or  a  copy  of  the  newspaper 
containing  the  notice  of  the  meeting,  should  be  presented 


MEETINGS  3- 

and  read  by  the  secretary,  and  a  record  of  the  same  should 
be  made  in  the  minutes. 

The  minutes  of  the  previous  annual  meeting  and  usually 
of  any  intervening"  special  meetings,  are  read  by  the  secre- 
tary as  the  next  order  of  business.  If  any  changes  in  the 
minutes  are  found  necessary,  they  must  be  made  by  means 
of  motions  duly  seconded  and  passed.  Such  changes  are 
usually  made  by  interlining — ^the  amended  material  being 
crossed  out  with  red  ink — or  by  marginal  annotation;  or, 
if  the  new  matter  is  too  lengthy  for  this,  it  is  brought  in  at 
the  end  of  the  minutes,  a  note  against  the  amended  portion 
telling  where  the  amendment  may  be  found. 

§  40.    Annual  Meeting — Election  of  Directors 

One  of  the  most  important  matters  coming  before  the 
annual  meeting  of  stockholders  is  the  election  of  new 
directors  to  serve  for  the  ensuing  year  or  term.  If  there 
are  many  directors,  the  term  of  office  may  extend  over  a 
number  of  years;  and  in  this  case  the  membership  of  the 
board  is  so  arranged  that  a  majority  always  holds  over. 
For  instance,  in  a  board  of  fifteen  directors  it  might  be 
arranged  for  the  terms  of  five  to  expire  each  year,  the  new 
directors  being  chosen  to  serve  for  the  ensuing  three  years. 
The  advantage  of  this  method  is  found  in  the  fact  that  a 
majority  of  the  board  will  always  consist  of  experienced 
directors. 

The  election  of  directors  is  usually  by  ballot  and  is  con- 
ducted by  judges  or  inspectors  of  election.  These  judges 
or  inspectors — generally  two  in  number — may  or  may  not 
be  stockholders  unless  fixed  by  statute  or  other  authority. 
In  some  states  the  statutes  require  that  the  inspectors  be 
sworn  to  the  faithful  discharge  of  their  duties  before  a 
notary  or  other  person  qualified  to  administer  oaths. 

In  the  absence  of  statutory  requirements,  the  election  of 


36 


ORGANIZATION    AND    PROCEDURE 


directors  becomes  a  very  simple  matter.  Nominations  are 
usually  made  in  advance,  and  either  the  secretary  or  tellers 
appointed  for  the  purpose  distribute,  collect,  and  count  the 
ballots.  The  result  of  the  election  is  then  announced  and 
the  successful  candidates  are  formally  declared  elected. 

§  41.    Annual  Meeting — Cumulative  Voting 

Cumulative  voting  is  a  method  of  voting  for  directors 
which  permits  of  such  cumulation  or  concentration  of  votes 
that  the  holders  of  less  than  a  majority  of  the  stock  may 
by  proper  combination  elect  one  or  more  members  of  the 
board ;  this  under  the  ordinary  method  of  voting  being  im- 
possible. Representation  on  the  board  is  advantageous  to 
the  minority  stockholders  because  it  enables  them  to  keep 
more  fully  informed  as  to  the  general  affairs  of  the  cor- 
poration, and  more  particularly  as  to  any  official  action 
contemplated  or  taken  by  the  board.  If  any  such  action 
seems  to  them  injurious  or  illegal,  their  prompt  knowledge 
of  what  is  done  gives  them  an  opportunity  to  protest  or  to 
take  any  legal  action  that  may  be  necessary. 

Cumulative  voting  is  prescribed  in  some  states  by  con- 
stitutional or  statutory  provision.  In  most  of  the  states  it 
may  be  secured,  when  desired,  by  charter  or  by-law 
provision. 

The  cumulative  method  of  voting  is  merely  a  modifica- 
tion of  the  usual  plan  of  voting.  Ordinarily  every  share 
standing  in  the  name  of  a  stockholder  on  the  books  of  the 
corporation  entitles  him  to  one  vote  for  each  of  as  many 
directors  as  are  to  be  elected.  For  instance,  if  a  board  of 
five  directors  is  to  be  elected,  the  owner  of  one  share  may 
cast  one  vote  for  each  of  five  candidates;  in  other  words, 
he  must  divide  his  five  votes  among  the  five  candidates,  one 
to  each.  Under  the  cumulative  method,  he  still  has  his  five 
votes  and  may  still  divide  these  five  votes  among  five  can- 


MEETINGS  37 

didates;  but  if  he  prefers,  he  may  cast  them  all  for  one 
candidate,  or  divide  them  among  two  or  more  as  he  sees  fit. 

To  illustrate  more  fully,  suppose  a  company  with  a 
board  of  five  directors  has  lOO  shares  of  stock  outstanding, 
70  shares  of  which  are  held  by  parties  who  vote  together 
and  constitute  a  majority ;  and  30  shares  held  by  the  minority 
stockholders  who  likewise  vote  together.  Under  the  ordinary 
system  of  voting,  the  five  candidates  favored  by  the  majority 
would  each  receive  70  votes  and  be  elected,  while  the 
minority  candidates  could  receive  only  30  votes  each  and 
would  fail.  Under  the  cumulative  system,  however,  the 
majority  having  350  votes  (70  X  5)  could  give  five  candi- 
dates 70  votes  each;  while  the  minority  having  150  votes 
(30  X  5)  at  their  disposal,  could  divide  them  between  two 
of  their  candidates  and,  if  the  majority  voted  in  the  manner 
suggested,  would  elect  both  of  them.  The  majority  would 
then  have  three  members  of  the  board,  while  the  minority 
had  two. 

In  such  a  case,  however,  the  majority  would  undoubtedly 
divide  their  350  votes  among  four  candidates,  giving,  say, 
two  87  votes  and  two  88  votes,  which  would  unfailingly 
elect  the  four  candidates;  and  the  minority  could  elect  but 
one  member  of  the  board,  but  could  not  in  any  way  be 
prevented  from  electing  this  one  member. 

The  number  of  votes  available  under  the  cumulative 
system  of  voting  is  found  by  multiplying  the  number  of 
shares  by  the  number  of  directors  to  be  elected. 

§  42.    Annual  Meeting — Reports 

Reports  of  officers  and  committees  as  prescribed  by  the 
by-laws  are  presented  at  the  annual  meeting.  The  usual 
reports  are  the  president's  report  of  general  conditions  and 
the  treasurer's  report  of  financial  conditions.  Any  com- 
mittees appointed  by  the  stockholders  at  preceding  meet- 


^8  ORGANIZATION    AND    PROCEDURE 

ings  will,  as  a  matter  of  course,  report  at  the  annual  meeting, 
and  any  other  special  reports  covering  matters  of  interest  to 
the  stockholders  might  also  be  read  at  this  meeting.  (See 
Part  V,  "Corporate  Reports  and  Statements.") 

§  43.     Annual  Meeting — Minutes 

When  there  is  no  further  business  to  come  before  the 
meeting,  it  is  adjourned.  As  soon  as  possible  thereafter 
the  secretary  should  write  up  his  minutes  while  the  details 
of  the  meeting  are  fresh  in  his  mind.  The  minutes  of  the 
annual  meeting,  as  of  any  other  meeting,  should  be  a  com- 
plete and  accurate  statement  of  the  procedure  at  the  meet- 
ing. They  should  give  the  place  and  date  of  meeting;  copy 
of  the  notice  given;  the  name  of  the  presiding  and  of  the 
recording  officer;  the  attendance,  i.e.,  the  amount  of  stock 
represented,  and  whether  it  constitutes  a  quorum;  and 
should  follow  this  with  a  brief  but  accurate  statement  of 
all  business  transacted  at  the  meeting.  When  matters  passed 
upon  are  of  but  little  importance,  the  exact  wording  of  the 
motion  or  resolution  need  not  be  brought  into  the  minutes, 
but  merely  a  statement  of  the  fact  that  such  a  motion  was 
made  and  carried  or  not  carried,  as  the  case  may  be.  Where, 
however,  the  matter  is  of  importance,  it  is  usually  advisable 
to  embody  in  the  minutes  the  exact  wording  of  the  motion 
or  resolution,  with  the  names  of  the  parties  who  respectively 
introduced  and  seconded  it.  In  matters  of  great  importance 
the  names  of  those  voting  for  and  against  are  usually 
recorded. 

Any  important  reports  or  other  matters  presented  to  the 
meeting  should  be  noted,  and  if  in  writing  should,  when  so 
ordered  by  the  meeting,  be  "spread  on  the  minutes,"  i.e., 
written  out  in  full ;  but  otherwise  it  is  quite  sufficient  merely 
to  refer  to  the  matter  in  the  minutes.  The  secretary  will, 
of  course,  in  all  cases  preserve  the  reports  or  other  papers. 


MEETINGS  3Q 

Tlie  minutes  of  any  meeting-  should  be  signed  by  the 
secretary  and,  if  possible,  by  the  presiding  officer  of  the 
meeting.  (For  forms  of  minutes,  see  Appendix,  Forms 
4  and  7.) 

§  44.    Directors'  Meetings 

Meetings  of .  directors,  as  in  the  case  of  stockholders, 
may  be  regular  or  special;  regular  meetings  being  usually 
monthly  or  quarterly.  The  notice  of  all  meetings  of 
directors,  whether  regular  or  special,  is  sent  out  by  the 
secretary,  the  requirements  for  such  notice  being  prescribed 
by  the  by-laws. 

The  president  of  the  company  is  the  presiding  officer 
at  all  board  meetings  unless  otherwise  specifically  provided 
in  the  by-laws.    The  secretary  is  the  recording  officer. 

At  a  directors'  meeting  the  quorum  is  fixed  by  the  by- 
laws and  is  not  infrequently  less  than  a  majority  of  the 
board.  Absent  members  cannot  be  represented  by  proxy. 
In  other  words,  if  a  member  of  the  board  Is  unable  to  be 
present,  his  vote  is  lost  absolutely.  This  is  because  the 
stockholders  have  elected  the  directors  to  represent  them, 
and  these  directors  cannot  pass  this  delegated  power  on  to 
someone  else.  • 

The  general  procedure  at  directors'  meetings  and  the 
duties  of  the  secretary  are  much  the  same  as  in  the  case  of 
stockholders'  meetings.  The  directors'  minutes  are  some- 
times kept  in  the  same  book  as  the  stockholders'  minutes,  but 
are  frequently  kept  in  a  separate  book.  Where  they  are 
kept  in  the  same  book,  they  either  follow  seriatim  as  the 
different  meetings  are  held,  or  one  part  of  the  book  may 
be  kept  for  the  minutes  of  the  stockholders'  meetings  and 
another  part  of  the  book  for  the  minutes  of  the  directors' 
meetings;  the  matter  usually  being  left  to  the  secretary  to 
decide. 


40  ORGANIZATION    AND    PROCEDURE 

As  soon  as  possible  after  the  annual  meeting  of  the  stock- 
holders the  directors  usually  meet  for  the  election  of  officers, 
any  newly  elected  directors  participating-  in  this  meeting-. 

§  45.    Special  Meetings 

Special  meetings,  as  distinguished  from  regular  meet- 
ings, are  meetings  called  to  transact  special  business  as 
required,  and  on  such  notice  as  is  prescribed  by  the  by-laws. 
Calls  for  special  meetings  are  sent  out  by  the  secretary,  and 
must  be  authorized  as  prescribed  by  the  by-laws ;  the  authori- 
zation is  usually,  in  the  case  of  special  meetings  of  stock- 
holders, by  the  board  of  directors,  the  president  of  the 
company,  or  a  certain  proportion  of  the  stockholders;  or 
for  special  meetings  of  the  board,  by  the  president  or  a 
certain  number  of  the  directors.  The  secretary's  call  usually 
states  by  what  authority  it  is  issued,  and  must  announce  the 
time  and  place  of  the  meeting  and  the  matters  to  be  con- 
sidered at  that  meeting,  and  only  such  business  may  be 
transacted  as  is  stated  in  the  call.  If  other  business  should 
be  transacted,  any  parties  aggrieved  thereby  could,  if  the 
injury  were  real,  have  such  action  of  the  meeting  annulled. 

The  officers  of  a  special  meeting  of  stockholders  and 
the  general  procedure  thereat  are  much  the  same  as  in  the 
case  of  a  regular  meeting.  It  may  be  noted,  however,  that 
as  the  legality  of  a  special  meeting  depends  largely  upon  the 
legality  and  proper  form  of  the  call  and  notice  by  which  it 
is  assembled,  this  call  and  notice  is  of  much  greater  im- 
portance than  the  notice  of  a  regular  meeting;  and  the 
particulars  in  regard  to  it,  together  with  the  call  and  notice 
itself,  should  be  entered  in  detail  upon  the  minutes. 

§  46.    The  Corporate  Calendar 

The  corporate  calendar  is  in  effect  a  tickler,  containing 
memoranda  of  the  important  corporate  events  of  the  year, 


THE    CORPORATE    CALENDAR 


41 


arranged  chronologically  under  the  dates  on  which  they 
occur.  By  consulting  his  calendar  the  secretary  can  deter- 
mine at  any  time  what  official  details  require  attention  on 
that  or  any  future  date. 

This  is  particularly  important  for  the  secretary,  because 
on  him  devolves  the  responsibility  for  all  notices  and  other 
preparation  for  meetings,  and  usually  for  the  reports  re- 
quired by  state  or  local  regulations  and  for  other  corporate 
matters  requiring  attention  on  fixed  dates.  The  calendar 
may  be  arranged  in  order  of  dates  on  a  convenient  card, 
or  noted  on  an  ordinary  calendar.  In  either  case  it  should 
be  hung  in  a  conspicuous  place  for  ready  reference  so  that 
no  important  detail  shall  be  overlooked.  All  details  recorded 
on  the  calendar  should,  of  course,  be  accurate. 

§  47.    Contents  of  Corporate  Calendar 

The  corporation  calendar  which  follows  is  that  of  a  New 
York  corporation.  As  the  matters  to  be  attended  to  and  the 
dates  on  which  they  come  up  vary  with  the  different  states 
and  the  different  corporations,  the  calendar  given  can  only 
be  regarded  as  suggestive.  The  secretary  must  determine 
in  each  case  what  shall  be  recorded.  The  following  matters, 
among  others,  and  the  dates  on  which  they  require  atten- 
tion, should  be"  carefully  noted  : 

Closing  of  transfer  books 

Notice  of  annual  meeting 

Preparation  of  alphabetical  list  of  stockholders 

Annual  meeting 

Notice  of  directors'  meetings 

Directors'  meetings 

Dividend  dates 

Dates  for  paying  bond  interest 

Dates  for  making  reports 

Dates  for  payment  of  taxes 


42  ORGANIZATION    AND    PROCEDURE 

§  48.    Form  of.  Corporate  Calendar 

Corporate  Calendar 

OF  THE 

Hudson  River  Packing  Company 
OF  New  York  City 
1916 
January 

i  Franchise  Tax  Payable.  Must  be  paid  before  January  15. 
(Based  upon  November  report  to  State  Comptroller.  State- 
ment of  amount  of  tax  is  sent  to  Company  by  State  Comp- 
troller. Checks  should  be  made  payable  to  State  Treasurer.) 
Federal  Income  Tax  Report.  Must  be  prepared  and  filed  with 
Collector  of  District  before  March  i  (unless  a  date  other  than 
December  31  has  been  designated  as  the  close  of  the  fiscal 
year). 
3  Notify  Stockholders  of  annual  meeting  to  be  held  January  13.. 
9  Notify  Directors  of  meeting  to  be  held  January  14.  (If  direc- 
tors are  elected  at  annual  meeting,  January  13,  this  notice  will 
be  vitiated  as  to  all  directors  elected  at  such  meeting  and  must 
be  replaced  by  waiver  of  notice  signed  after  election  by  all  the 
newly  elected  directors.) 

13  Annual  Meeting  of  stockholders  at  3  p.m. 

14  Directors'  Meeting  at  4  p.m.  (If  directors  were  elected  at 
annual  meeting,  waiver  of  notice  should  be  signed  by  each  new 
director.) 

15  Last  Day  for  payment  of  State  Franchise  Tax. 

City  Taxes.     On  this  date  unpaid  city  tax  bills  for  personal 
taxes  may  be  sent  to  the  City  Marshall  for  collection. 
17        Annual  Report  to  State  officials.     Must  be  filed  during  Jan- 
uary and  not  later  than  January  31  with  Secretary  of  State. 
(No  filing  fees.    Blanks  not  supplied  by  officials.    No  penalty 
incurred  for  omission  of  the  report  unless  such  filing  is  re- 
quested by  some  stockholder  or  creditor  of  the  company,  and 
not  then  if  the  report  is  filed  within  thirty  days  after  the 
request  is  made.) 
31        Last  Day  for  filing  annual  report 
March 

I        Last  Day  for  filing  Federal  Income  Tax  Report. 
April 

9        Notify  Directors  of  meeting  to  be  held  April  14. 
14       Directors'  Meeting  at  4  p.m. 


THE    CORPORATE    CALENDAR 


43 


June 

I        Assessment  of  Federal  Income  Tax  made. 
30        Last  Day  to  pay  Federal  Income  Tax. 

July 

9        Notify  Directors  of  meeting  to  be  held  July  14. 
14        Directors'  Meeting  at  4  p.m. 
October 

2        City  Assessments  made  for  next  year.    Books  open  for  correc- 
tion till  November  10  inclusive.     (If  notice  of  assessment  is 
not  received  in  the  early  part  of  October,  it  should  be  sent 
for.    Tax  Commissioners  usually  send  notice  but  are  under  no 
obligations  to  do  so.)     If  assessment  is  unsatisfactory,  sworn 
statement  of  correct  value  of  assets  must  be  prepared   and 
filed.     (See  memo,  for  November  10.) 
4        City  Taxes  Payable  for  current  year.     (Statement  of  amount 
is  usually  sent  to  all  corporations,  but  may  be  obtained  from 
Assessor's  office  if  copy  is  not  received.) 
7       Notify  Directors  of  meeting  to  be  held  October  13. 
13        Directors'  Meeting  at  4  p.m. 
November 

I        Comptroller's  Report.    Must  be  sent  in  on  or  before  November 
15.     (Blanks  furnished  by,  and  report  made  to.  State  Comp- 
troller.    No  filing  fees.     Penalty  may  be  incurred  by  failure 
to  make  this  report.) 
10        Statement  and  Application  for  revision  of  unsatisfactory  city 
assessments,    if   not  already   filed,    should   be    sent   in  to  the 
Commissioner   of  Taxes  and   Assessments.     Will  not  be   re- 
ceived after  November  30  save  for  real  estate.     (Blanks  fur- 
nished by  Commissioners.    No  filing  fees.) 
30        Last  Day   for   filing  application   for   revision  of   city  assess- 
ments, save  on  real  estate,  which  may  be  revised  at  any  time 
■before  payment  of  the  tax. 
December 
22        Close  Transfer  Books  for  annual  meeting  of  January  11,  1917. 
28        Publication  Notice  of  Annual  Meeting.     Notice  of  meeting  to 
be  held  January   11,   191 7,   to  be  published  in  newspaper   of 
New  York  County  once  each  week  for  two  successive  weeks 
immediately  preceding  the  annual  meeting. 


Part  II — Corporation  Records  and  Accounts 


CHAPTER    IV 

THE  BCX)KS   AND    RECORDS   OF   A 
CORPORATION 

§  49.    Books  of  Account 

The  books  of  account  for  the  ordinary  corporation  are 
similar  to  any  other  books  of  account,  save  as  to  the  entries 
for  distinctive  corporate  transactions.  All  the  records  and 
accounts  peculiar  to  corporations  are  discussed  in  the  present 
volume ;  but  for  the  character  and  use  of  the  books  relating 
to  the  ordinary  commercial  transactions  the  reader  is  re- 
ferred to  any  text  on  accounting". 

§  50.    Requirements 

The  general  books  of  a  corporation  differ  little  from 
those  of  a  partnership  or  a  single  proprietorship  conducting 
a  similar  line  of  business.  In  a  corporation,  however,  there 
is,  in  addition  to  the  financial  books  of  account  which  record 
the  transactions  of  ordinary  business,  another  class  of  books, 
such  as  the  minute  book,  stock  book,  dividend  book,  bond 
record,  etc.,  for  recording  the  activities  peculiar  to  the  cor- 
porate form.  So  necessary  are  these  books  that  in  many 
states  the  laws  specify  that  certain  of  them,  as  the  minute 
book,  stock  book,  transfer  book,  etc.,  shall  be  kept.  There 
are,  therefore,  in  corporate  bookkeeping,  books  and  accounts 
not  found  in  the  records  of  the  partnership  or  the  single 
proprietorship. 

44 


BOOKS    AND    RECORDS 


45 


The  distinctive  books  of  record  to  be  kept  by  a  cor- 
poration are  frequently  set  forth  in  its  by-laws;  although 
the  books  so  enumerated  would  usually  be  kept  as  a  matter 
of  course  by  any  well-managed  corporation. 

Under  these  conditions  the  accountant,  when  devising  an 
accounting  system  for  a  corporation,  must  first  consult  the 
statutes  of  the  state  to  ascertain  the  legal  requirements. 
Frequently  the  statutes  not  only  prescribe  certain  books,  but 
also  specify  where  these  books  must  be  kept  and  what  they 
must  contain.  Next,  he  must  consult  the  by-laws  of  the 
corporation  to  ascertain  their  requirements  as  to  books  and 
records.  Then,  in  addition  to  the  books  required  by  the 
laws  and  the  corporation  by-laws,  he  must  add  such  other 
books  as  are  needed  to  make  a  complete  record  of  the  finan- 
cial transactions  of  the  corporation. 

§  51.    Inspection  of  Corporate  Records . 

Stockholders  usually  have,  within  limits,  the  rlg.ht  to 
examine  the  corporate  books.  This  right  extends  much 
further  as  to  official  records,  such  as  the  stock  ledger,  etc., 
than  as  to  the  books  of  account.  The  stockholder's  right  to 
examine  the  latter  is  usually  much  restricted  and  in  some 
states  denied  entirely.  In  the  State  of  New  York,  for 
example,  every  corporation  must  keep  a  stock  book  in  pre- 
scribed form,  and  this  book  must  be  open  for  inspection  by 
the  stockholders  at  least  three  hours  daily.  A  penalty  of 
$50  a  day  is  imposed  upon  the  corporation  and  upon  the 
particular  official  for  failure  to  comply  with  this  require- 
ment. On  the  other  hand,  in  this  same  state,  the  stock- 
holders' right  to  inspect  the  books  of  account  is  practically 
nil.  A  director,  however,  has  the  absolute  right  at  any  time 
to  examine  the  books  of  account  as  well  as  the  other  cor- 
porate records,  and  this  is  true  in  practically  all  the  states. 
This  is  part  of  his  duties  as  director. 


^6    CORPORATION  RECORDS  AND  ACCOUNTS 

§  52.    Corporate  Books  of  Record 

The  distinctive  corporate  books  include  those  in  which 
are  entered  the  official  acts  and  resolutions  of  the  directors 
and  stockholders,  and  also  those  which  contain  detailed 
records  of  transactions  pertaining  to  stock  and  bond  issues, 
dividends,  etc.  The  books  of  official  record  and  the  various 
stock  books  are  usually  kept  by  the  secretary.  The  financial 
records  relating"  to  the  sale  of  stock  and  bonds  are  usually 
under  the  supervision  of  the  treasurer  or  are  kept  in  the 
accounting"  department  of  the  corporation,  as  are  also  the 
bond  register,  the  dividend  book,  and  other  records  which 
pertain  more  directly  to  the  corporate  finances. 

The  usual  corporate  records  include : 

Minute  book  (§53) 
Subscription  records  (§55) 
Instalment  receipts  (§§  56,  57) 
Instalment  book  (§  58) 
Stock  certificate  book  ( §  60) 
Stock  transfer  book  (§62) 
Register  of  transfers  (§63) 
Stock  ledger  (§§  65,  66) 
Dividend  book  (^67;  Chapter  IX) 
Bond  register  (§  211;  Chapter  XVI) 

This  number  might  be  extended  considerably,  and  sub- 
divisions made,  especially  in  the  case  of  large  corporations. 
On  the  other  hand,  in  the  case  of  a  small  company  some  of 
the  enumerated  books  would  be  omitted  entirely.  Indeed, 
in  some  companies,  especially  where  the  stock  is  held  by  a 
few  individuals,  the  bookkeeping  is  as  informal  as  in  a 
partnership  and  but  few  of  the  distinctive  corporate  records 
are  kept.  It  is,  however,  a  wise  precaution  always  to  pro- 
vide for  the  proper  record  of  all  corporate  transactions,  no 
matter  how  small  the  corporation  or  how  closely  its  stock 


BOOKS    AND    RECORDS 


47 


may  be  held.  If  this  is  not  done,  trouble  may  result ;  "an 
ounce  of  prevention  is  worth  a  pound  of  cure." 

All  the  books  enumerated  above  are  auxiliary  books,  i.e., 
they  are  not  used  as  posting  mediums  for  the  general  books, 
but  are  subordinate  thereto. 

A  book  known  as  a  "combination  record"  is  frequently 
used  by  the  smaller  corporations  for  the  distinctive  corporate 
records.  This  book  is  divided  into  parts,  each  of  which 
takes  the  place  of  the  more  important  of  the  distinctive  cor- 
porate records  mentioned  above.  If  the  forms  included  in 
it  are  good,  the  combination  record  will  be  found  convenient 
for  the  ordinary  small  corporation.  For  the  larger  corpora- 
tion it  is  not  suitable. 

§  53.    The  Minute  Book 

The  minute  book  is  used  to  record  the  proceedings  at 
meetings  of  stockholders  and  directors.  At  the  present  time 
the  usual  form  of  minute  book  is  a  loose-leaf  book,  in  which 
the  minutes  may  be  entered  with  a  typewriter.  Under  this 
system,  to  guard  against  substitution  of  pages  after  the 
minutes  are  written  up,  each  separate  sheet  should  be  signed 
by  the  secretary  and,  in  the  more  expensive  books,  each 
sheet  is  specially  numbered  on  w^atermarked  paper,  so  that 
substitution  is  practically  impossible.  The  convenience  of 
the  loose-leaf  minute  book  is  obvious. 

In  large  corporations  separate  books  are  kept  for  the 
stockholders'  and  directors'  minutes,  but  in  the  smaller  cor- 
porations the  minutes  of  all  meetings  are  usually  entered  in 
one  book.  In  such  case,  either  the  first  part  may  be  allotted 
to  the  meetings  of  stockholders  and  the  latter  part  to  the 
directors'  meetings;  or,  as  is  done  more  frequently,  the 
minutes  of  the  various  meetings  may  be  entered  one  after 
the  other  as  they  occur.  Under  this  arrangement,  the  first 
minutes  to  appear  in  the  book  would  in  most  cases  be  those 


48    CORPORATION  RECORDS  AND  ACCOUNTS 

of  the  first  meeting  of  stockholders.  These  would  be  fol- 
lowed by  the  minutes  of  the  first  meeting  of  directors ;  and 
thereafter  the  minutes  would  come  in  the  order  in  which  the 
different  meetings  were  held.  As  the  stockholders  usually 
meet  but  once  a  year,  and  the  directors  much  oftener,  the 
minutes  of  the  stockholders'  meetings  will  then  be  separated 
by  the  more  numerous  minutes  of  the  intervening  directors' 
meetings. 

A  copy  of  the  charter  of  the  corporation  is  often  bound 
into  the  minute  book,  forming  its  first  pages ;  or,  where  this 
is  not  convenient,  the  charter  is  copied  or  pasted  on  the 
first  pages  of  the  minute  book.  Following  the  charter,  a 
page  or  more  is  usually  allowed  for  the  entry  of  charter 
amendments.  Next,  beginning  at  the  top  of  a  right-hand 
page,  the  by-laws  of  the  corporation  are  entered,  the  next 
few  pages  being  left  blank  for  new  by-laws  or  any  amend- 
ments too  long  to  be  interlined  in  the  by-laws  themselves. 
Finally,  in  the  body  of  the  book  come  the  minutes  of  the 
various  meetings. 

Minutes  should  be  entered  in  the  minute  book  as  soon 
after  the  meeting  as  possible.  The  minutes  of  each  meeting 
should  begin  at  the  top  of  a  new  page ;  and  the  character  of 
the  meeting,  i.e.,  whether  a  stockholders'  or  directors'  meet- 
ing, and  whether  regular,  special,  or  adjourned,  should 
appear  clearly  in  the  heading.  The  date  also  should  appear 
prominently.  In  the  body  of  the  minutes  it  should  be  stated 
how  the  meeting  was  called ;  whether  a  quorum  was  present ; 
the  names  of  the  presiding  and  recording  officers ;  the  time 
at  which  the  meeting  convened,  etc. 

The  minute  book  is  one  of  the  most  important  of  the 
corporate  records.  The  minutes  are  the  officers'  authority 
for  many  of  their  most  important  acts  and  from  these  same 
minutes  the  accountant  gets  his  data  for  many  of  his  most 
important  entries.     The  necessity  for  complete,  accurate 


BOOKS    AND    RECORDS  49. 

and  properly  evidenced  minutes  is  obvious.  Complete  forms 
of  minutes  will  be  found  in  the  Appendix  (Forms  4  and  7). 
It  is  the  duty  of  the  secretary  to  keep  the  minutes  of 
meetings. 

§  54.    Stock  Subscriptions 

Subscriptions  to  stock  are  not  binding  upon  the  sub- 
scribers until  accepted  by  the  corporation,  or  by  an  author- 
ized representative  or  trustee  of  the  corporation.  Until  such 
acceptance,  there  is  no  second  party,  and  under  such  circum- 
stances a  subscription  is  merely  an  ofifer  to  take  stock,  which 
can  be  rescinded  or  revoked  by  the  subscriber  at  any  time. 
Indeed,  in  some  cases  where  subscriptions  have  been  ac- 
cepted by  an  organization  committee,  it  has  been  held  that 
the  subscriber  might  cancel  his  subscription  at  any  time 
before  the  actual  incorporation.  Where,  however,  an  or- 
ganization committee  incurs  some  expense  in  connection 
with  a  proposed  incorporation,  it  is  doubtful  whether  sub- 
scribers who  are  fully  aware  of  such  expenditure  can  be 
relieved  from  their  proportion  of  these  expenses  by  a 
revocation  of  their  subscriptions. 

In  some  states,  all  the  capital  stock  must  be  subscribed 
before  incorporation,  and  in  some  other  states  a  specified 
proportion  or  amount  must  be  subscribed  before  the  corpora- 
tion may  be  organized.  In  such  cases,  subscriptions  are 
usually  not  payable  until  the  amount  required  by  the  statute 
has  been  subscribed. 

Full-paid  stock  is  sometimes  issued  in  exchange  for 
services,  for  property,  or  for  other  considerations ;  and  it  is 
not  uncommon  for  subscriptions  to  be  paid  by  promissory 
notes.  In  the  State  of  New  York,  however,  corporation 
officials  are  prohibited  under  heavy  penalties  from  accepting 
notes  in  payment  of  stock  subscriptions ;  but  such  payments, 
if  in  good  faith,  would  be  valid  in  most  states. 


so 


CORPOPIATION    RECORDS    AND    ACCOUNTS 


§  55.    The  Subscription  Book  or  List 

Subscription  books  are  seldom  used  in  this  country, 
except,  perhaps,  for  collating  and  recording  subscriptions 
after  the  subscribed  lists  have  been  turned  in.  The  sub- 
scription Hst  usually  consists  of  a  sheet  or  sheets  of  paper 
with  suitable  headings,  on  which  subscribers  to  the  stock  of 
the  company  enter  their  subscriptions.  At  times,  several 
different  subscription  lists  are  circulated  simultaneously,  and 
in  this  case  the  sheet  form  is,  of  course,  employed.  Sub- 
scription lists  are  seldom  used  in  floating  small  corpora- 
tions; but  for  larger  ones,  or  where  subscriptions  are 
solicited,  they  are  necessary. 

The  following  forms  illustrate  some  of  the  subscription 
blanks  and  agreements  in  ordinary  use : 


Subscription  List 

Davison  Mercantile  Company 

To  Be  Incorporated  Under  the  Laws  of  New  York 

Capital  Stock  $200,000  Shares  $100  each 

We,  the  undersigned,  hereby  severally  subscribe  for  and  agree  to 
take  at  their  par  value,  the  number  of  shares  of  the  capital  stock  of 
the  Davison  Mercantile  Company  set  opposite  our  respective  signatures, 
said  subscriptions  to  become  due  as  soon  as  said  Company  is  organized, 
and  to  be  then  payable  in  cash  on  demand  of  the  Treasurer  of  the 
Company. 

New  York  City,  New,  York, 
April  5,  1916. 


Names 

Addresses 

Shares 

Amounts 

A.  W.  Davison 
George  H.  Brandon 
R.  S,  Cooke 
James  Robinson 

23s  West  Soth  St.,  New  York 
846   York  Ave.,  New  York 
164  King  St.,  Brooklyn,  N.  Y. 
Jersey  City,  N.  J. 

Subscription  List 

800 
300 
200 
200 

$80,000 
30,000 
20,000 
20,000 

BOOKS    AND    RECORDS 


51 


This  form  is  satisfactory  when  only  a  few  persons 
are  concerned,  and  when  the  purposes  of  the  company  and 
conditions  of  subscription  are  well  known.  In  this  case 
subscriptions  are  not  payable  until  the  organization  is  com- 
pleted. At  the  same  time,  it  is  obvious  that  money  to  pay 
the  incorporation  fees  must  be  raised  before  the  charter  can 
be  secured.  To  meet  this  emergency  the  incorporators 
usually  supply  the  initial  funds  required,  this  advance  being 
applied  on  their  subscriptions,  or  repaid  from  the  corporate 
funds  after  organization. 

It  may  be  noted  that,  while  as  a  rule  subscriptions  to 
the  stock  of  a  new  company  prior  to  its  organization  require 
formal  acceptance  by  the  board  of  directors,  when  these 
latter  are  elected,  to  make  such  subscriptions  binding  and 
legally  enforcible,  the  incorporators,  by  signing  the  charter 
application  in  which  their  subscriptions  appear,  make  an 
irrevocable  subscription. 

When  subscriptions  are  payable  on  the  instalment  plan, 
the  terms  should  be  set  forth  in  the  subscription  agreement. 
If  the  company  is  to  issue  both  common  and  preferred  stock, 
the  subscription  agreement  should  explain  the  conditions, 
unless  separate  blanks  are  provided  for  the  different  kinds 
of  stock. 

It  might  be  highly  embarrassing  to  the  incorporators  to 
have  subscriptions  revoked  before  acceptance  by  the  com- 
pany; and  to  avoid  this  possibility  subscriptions  may  be 
made  through  a  committee,  or  a  trustee  appointed  for  that 
purpose,  as  in  the  following  subscription  list.  This  pro- 
vides the  necessary  second  party  to  the  contract  and  makes 
the  subscriptions  binding  before  incorporation.  Under  such 
an  agreement  the  new  corporation,  when  organized,  may 
bring  suit  to  enforce  payment  of  the  subscription.  In  a  way, 
however,  the  agreement  is .  still  one-sided,  as  no  contract 
is  binding  on  the  newly  organized  corporation  until  accepted 


52    CORPORATION  RECORDS  AND  ACCOUNTS 

by  the  corporation  itself.  This  question,  however,  seldom 
arises,  as  the  acceptance  of  subscriptions  by  the  new  cor- 
poration almost  invariably  follows. 

Subscription  List 
Lancaster  Cement  Company 

To  be   Incorporated  under  the   Laws   of   the 

State  of  Pennsylvania  for  the  Manufacture 

of  Portland  Cement 


Capital  Stock  $1,000,000 


Shares  $100  each 


We,  the  undersigned,  hereby  agree  with  Thomas  G.  Williams  as 
Trustee  for  the  Lancaster  Cement  Company,  to  subscribe,  and  do 
hereby  severally  subscribe,  for  the  number  of  shares  of  the  capital 
stock  of  said  Company  set  opposite  our  respective  signatures,  and 
agree  to  pay  the  par  value  thereof  as  follows : 

Ten  per  cent  on  demand  of  Thomas  G.  Williams  as  Trustee  for 
said  Company,  such  payment,  or  so  much  thereof  as  may  be  necessary, 
to  be  used  for  the  preliminary  and  incorporating  expenses  of  said 
Company ;  thirty  per  cent  to  the  Treasurer  of  the  Company  so  soon  as 
said  corporation  is  organized;  twenty-five  per  cent  on  demand  of  the 
Treasurer  of  the  Company  at  any  time  after  ninety  days  from  the  date 
of  incorporation,  and  the  remainder  at  such  times  and  in  such  instal- 
ments as  may  be  prescribed  by  the  Board  of  Directors. 

Lancaster,  Pa., 
May  2,  1916. 


Names 

Addresses 

Shares 

Amounts 

Ronald  Logan 

627  Warren  Ave.,  Lancaster 

1,000 

$100,000 

Samuel  Bennett 

4425  Spruce  St.,  Philadelphia 

1,000 

100,000 

A.  W.  Thompson 

Lancaster,  Pa. 

1,000 

100,000 

J.  H.  Connor 

Harrisburg,  Pa. 

1,000 

100,000 

0.  K.  Ferguson 

1420  Arch  St.,  Philadelphia 

1,000 

100,000 

Subscription  List,  Trustee's 


The  form  illustrated  on  page  53  is  brief  and  explicit, 
and  is  in  general  use.  It  may  be  conveniently  inclosed  with 
a  prospectus  or  letter.     It  reserves  to  the  incorporators 


BOOKS    AND    RECORDS 


S3 


the  right  to  reject  or  prorate  subscriptions,  thus  enabling 
them  to  exclude  undesirable  subscribers,  and  to  reject  or 
prorate  applications  in  case  of  over-subscription.  It  will 
be  seen,  in  this  form,  that  the  names  of  the  incorporators 
are  brought  in,  but  solely  as  a  means  of  identifying  more 
clearly  the  proposed  corporation.  If  there  is  any  danger  of 
subscriptions  being  cancelled,  trustees  should  be  made  parties 
to  the  agreement. 

The  Rubberoid  Tire  Company 

479  Springfield  Avenue 

Jersey  City,  N.  J. 

To  be  Incorporated  under  the  Laws  of  New  Jersey  for  the 

Manufacture  of  Automobile  Tires 

By  Frank  Alston,  John  Stone,  and  Howard  Cole 

Capital  Stock  $500,000  Shares  $10  each 

I  hereby  subscribe  for shares  of  the  capital  stock  of  The 

Rubberoid  Tire  Company  at  the  par  value  thereof,  and  agree  to  pay 
twenty-five  per  cent  of  such  subscription  on  demand  of  the  Treasurer 
so  soon  as  said  Company  is  incorporated,  and  twenty-five  per  cent  on 
demand  of  the  Treasurer  of  the  Company  at  any  time  after  ninety 
days  from  the  incorporation  of  said  Company;  the  remainder  of  said 
subscription  to  be  paid  at  such  times  and  in  such  amounts,  not  exceed- 
ing ten  per  cent  of  said  subscriptions  in  any  one  month,  as  may  be 
required  by  the  Board  of  Directors  of  said  Company. 
Dated 


The  right  is  reserved  to  reject  or  prorate  any  or  all  subscriptions. 
Subscription  Blank,  Individual 

§  56.    Instalment  Receipts 

When  subscriptions  are  payable  in  instalments,  stock 
certificates  should  not  be  issued  until  the  full  amount  has 
been  paid — a  rule  that  is  frequently  violated.  In  some  cor- 
porations special  certificates  closely  resembling  stock  scrip 
are  issued  upon  payment  of  a  prescribed  fractional  part  of 
the  subscription,  the  certificate  itself  specifying  the  terms 


54 


CORPORATION  RECORDS  AND  ACCOUNTS 


of  payment  and  providing"  space  on  the  back  thereof  for 
the  indorsement  of  future  instalments.  An  examination  of 
such  a  certificate  and  its  indorsements  will  at  any  time 
indicate  whether  or  not  the  stock  is  fully  paid. 

Another  method  of  evidencing  payments  for  stock  sold 
on  the  instalment  plan  is  to  give  the  subscriber  a  receipt  for 
each  instalment  paid.  Such  receipts  are  known  as  "instal- 
ment receipts,"  or  "instalment  scrip."  When  the  final  instal- 
ment is  paid,  the  receipts  are  returned  to  the  company,  and 
a  stock  certificate  is  issued  for  the  total  number  of  shares. 
The  stockholder's  account  in  the  stockholders  ledger  will  at 
any  time  show  the  status  of  his  account  and  the  amount  of 
his  stock  holdings. 


^fe' 


No.  I  IS  Shares 

Denton  Manufacturing  Corporation 

Trustee's  Certificate 

$150.00 

I  hereby  certify  that  Robert  H.  Craig,  a  subscriber  for  Fifteen  Shares 
of  the  Capital  Stock  of  the  Denton  Manufacturing  Corporation,  at 
its  par  value  of  One  Hundred  Dollars  per  share,  has  paid  to  me  as 
Trustee  for  said  Corporation,  on  account  of  said  subscription  and  in 
accordance  with  its  terms,  the  sum  of  One  Hundred  and  Fifty  Dollars. 

This  receipt  will,  upon  the  organization  of  the  said  Denton  Manu- 
facturing Corporation,  be  received  and  credited  by  the  Treasurer 
thereof  to  its  full  amount  as  a  payment  upon  said  subscription. 

New  York,  Eldridge  Lewis, 

April  15,  1916  Trustee 

Trustee's  Receipt  for  Instalment  Payment 

The  instalment  receipt  book  may  consist  of  an  ordinary 
receipt  book  from  which  the  receipts  are  issued,  though  in 
large  companies  special  books  are  usually  printed  to  meet 
the  requirements.  The  details  of  each  receipt  issued  are 
recorded  on  its  stub,  from  which  the  proper  entries  may  be 
obtained  for  the  stockholders  ledger  and  also  for  the  other 


BOOKS    AND    RECORDS 


55 


books.  The  receipt  is  usually  signed  by  the  treasurer  and 
perhaps  by  one  other  officer  of  the  corporation.  If  it  is 
desired  to  sell  or  transfer  the  instalment  receipt  at  any  time, 
an  assignment  may  be  written  on  the  back ;  or  to  meet  such 
requirements  a  form  of  assignment  is  sometimes  printed 
on  the  back  of  the  receipt. 

Subscription  payments  before  incorporation  are  made 
to  a  designated  trustee  or  bank,  by  whom  receipts  are  given 
for  these  payments.  After  incorporation  they  are  made  to 
the  treasurer  of  the  company. 


No.  5  $100  5  Shares 

The  Hudson  Radiator  Company 

30  Broad  Street 
New  York 

Received  of  Edward  H.  Williamson  the  sum  of  One  Hundred 
Dollars,  instalment  payment  No.  5,  of  Twenty  Per  Cent  upon  his 
subscription  for  Five  Shares  of  the  Capital  Stock  of  the  Hudson 
Radiator  Company. 

New  York  City,  J.  H.  Wilcox, 

March  14,   1916  Treasurer 

Treasurer's  Receipt  for  Instalment  Payment 


§  57.    Stock  Scrip 

Stock  scrip,  or  instalment  scrip.  Is  practically  a  receipt 
for  instalments  on  account  of  stock  subscriptions;  but  the 
one  instrument  is  so  arranged  as  to  evidence  all  the  pay- 
m.ents  made.  Stock  scrip  is  usually  prepared  in  more 
elaborate  style  than  the  ordinary  instalment  receipt,  and  in 
such  form  as  to  permit  of  its  ready  sale  and  transfer  in  the 
same  manner  as  a  stock  certificate.  It  is  signed  by  the  presi- 
dent and  treasurer,  and  may  even  bear  the  seal  of  the  cor- 
poration. Subsequent  instalments  are  indorsed  on  the  back 
so  that  the  scrip  will  .exhibit  at  any  time  the  payments  made 
upon  the  holder's  subscription. 


56 


CORPORATION  RECORDS  AND  ACCOUNTS 


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BOOKS    AND    RECORDS 


57 


Date 

Number  of 
Instalment 

Amount 
Paid 

Signature  of  Treasurer 

May  3,  1916 
June  2,  1916 

2 
3 

$500.00 
150.00 

William  H.  Hansford 
William  H.  Hansford 

Instalment  Form  for  Stock  Scrip 

Instalment  scrip,  or  receipts,  may  as  a  rule  be  sold  or 
assigned  at  any  time  before  they  are  called  in  for  cancella- 
tion upon  final  payment.    A  general  form  of  assignment  is : 

For  Value  Received,  I  hereby  sell,  assign,  and  transfer  unto  John  H. 
Wardell  of  New  York  City,  my  subscription  to  Fifteen  Shares  of  the 
capital  stock  of  the  Lansford  Manufacturing  Corporation,  together 
with  the  payments  made  thereon,  all  as  evidenced  by  the  within  cer- 
tificate, and  I  do  hereby  authorize  and  instruct  the  proper  officials  of 
said  Corporation,  upon  completion  of  the  conditions  of  my  said  sub- 
scription, to  issue  said  stock  to  the  order  of  my  said  assignee. 

New  York,  December  4,  1916 

In  the  presence  of  Harold  Thompson 

Samuel  H.  Kennard 

Assignment  of  Subscription  and  Instalments 

§  58.    The  Instalment  Book 

The  instalment  book  is  used  when  an  instalment  falls 
due,  or  when  a  call  or  assessment  is  decided  upon  by  the 
board  of  directors.  As  will  be  seen  by  reference  to  the 
form  which  follows,  it  contains  a  list  of  the  subscribers,  the 
number  of  shares  subscribed  by  each,  and  the  amount  of  the 
instalment  due,  together  with  other  information  relating  to 
the  particular  instalment.  A  new  page  or  sheet  is  made  out 
for  each  call  or  instalment.  Instead  of  rewriting  the  names 
for  each  of  these,  the  same  list  may  be  utilized  by  ruling  up 
the  page  with  groups  of  columns,  each  group  adapted  for 
one  instalment;  or  by  the  use  of  short  pages  after  the  first. 
This  arrangement  may  cause  some  little  inconvenience  in 
case  subscription  rights  and  instalments  are  transferred, 
thereby  necessitating  changes  of  names. 


S8 


CORPORATION  RECORDS  AND  ACCOUNTS 


BOOKS    AND    RECORDS  59 

The  first  column  of  the  instalment  book  indicates  the 
folio  of  the  stockholders  ledger,  in  which  the  subscribers' 
accounts  are  recorded,  payments  being  posted  from  the 
instalment  book  to  the  credit  of  the  respective  accounts.  The 
last  column  preceding  the  remarks  column  indicates  the  cash 
book  folio  to  which  the  payments  may  be  carried  in  total 
each  day,  these  payments  being  credited  to  "Capital  Stock," 
"Capital  Stock  Subscribed,"  or  "Subscribers,"  according  to 
the  plan  of  opening  entries  used.  Since  instalments  on  sub- 
scriptions are  not  necessarily  paid  on  their  due  date,  it  is 
advisable  to  carry  the  total  of  each  day's  receipts  to  the 
cash  book,  instead  of  waiting  until  all  are  paid.  It  is  obvious 
that  an  account  for  "Subscribers"  must  be  opened  in  the 
general  ledger  and  charged  with  the  aggregate  amount  of 
subscriptions  due  at  that  particular  date.  The  same  pro- 
cedure is  required  for  each  succeeding  instalment. 

Occasionally,  accounts  are  opened  in  the  general  ledger 
for  individual  subscribers,  debiting  them  for  their  subscrip- 
tions and  crediting  them  for  their  payments.  If  there  are 
many  subscribers,  this  plan  is  objectionable  as  encumbering 
the  general  ledger  with  a  large  number  of  stockholders' 
accounts  which  should  by  right  be  contained  only  in  a  stock- 
holders ledger  (§§  65,  66). 

The  instalment  book  is  compiled  from  the  various  sub- 
scription sheets  or  individual  subscription  blanks,  and  may 
be  either  a  bound  or  loose-leaf  book.  Loose  sheets  serve 
the  purpose  nicely,  since  they  can  afterward  be  bound  to- 
gether for  filing. 

When  subscribers  to  stock  are  few  in  number,  the  in- 
stalment book  may  be  dispensed  with ;  and  cash  received  on 
instalments  may  be  entered  directly  in  the  cash  book,  and 
thence  posted  to  the  respective  subscribers'  accounts  in  the 
stockholders  ledger  and  in  total  to  the  proper  account  in 
the  general  ledger. 


CHAPTER    V 

THE   BOOKS    AND   RECORDS    OF   A 
CORPORATION— ( Continued) 

§  59.    Treasurer's  Receipt  for  Subscription  Payment 

When  a  subscription  to  stock  is  paid  in  full,  it  is 
customary  to  issue  the  subscriber  a  stock  certificate.  If  the 
certificates  are  not  ready  for  delivery,  a  receipt  is  given 
or  a  temporary  certificate  is  issued.  In  any  such  case,  the 
receipt  or  certificate  must  be  turned  in  for  cancellation 
before  it  is  replaced  with  a  permanent  certificate.  The 
following  form  of  receipt  is  self-explanatory.  It  is  ordinarily 
provided  with  a  stub  on  which  the  details  of  the  transactions 
are  recorded. 


No.  so  $1,000  10  Shares 

Walton  Publishing  Company 
No.  225  Atlantic  Avenue 
Brooklyn,  N.  Y. 

This  Is  to  Certify  that  Harry  H.  Wilson  has  paid  into  the 
treasury  of  the  WaUon  Publishing  Company  the  sum  of  One 
Thousand  Dollars,  payment  in  full  of  his  subscription  for  Ten 
Shares  of  its  capital  stock,  duly  executed  certificates  for  which 
will,  upon  surrender  of  this  receipt,  be  issued  to  his  order  as 
soon  as  said  Certificates  are  ready  for  delivery, 

June  14,  1916  Frank  J.  Ardwald, 

Treasurer 

Treasurer's  Receipt  for  Stock — Full  Payment 

§  60.    Stock  Certificate  Book 

There  is  usually  no  legal  requirement  as  to  the  size, 
form,  or  even  the  wording  of  a  stock  certificate,  but  it  must 

60 


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BOOKS    AND    RECORDS  6l. 

show  the  corporate  name,  the  state  in  which  the  corporation 
is  organized,  the  capitaHzation,  the  total  number  of  shares, 
the  number  of  shares  represented  by  the  certificate,  and 
whether  such  stock  is  full-paid.  The  certificates  are  num- 
bered and  issued  consecutively.  Occasionally,  ownership  in 
a  corporation  will  be  evidenced  by  a  simple  certificate 
written  on  the  typewriter  or  with  pen  and  ink;  and  some- 
times, where  the  ownership  is  vested  in  a  few  persons,  nv". 
certificates  are  issued,  the  stock  books  of  the  corporation 
forming  the  sole  evidence  of  stock  ownership.  There  is 
no  legal  objection  to  either  of  these  plans,  but  they  are 
obviously  inconvenient  and,  for  the  more  active  corpora- 
tions, inadequate.  Their  economy  is  their  chief  recom- 
mendation. 

Separate  certificates  for  the  different  classes  of  stock — 
common  stock  and  preferred  stock  (as  shown  on  pages  62, 
63) — are  usually  prepared,  though  it  is  not  unusual  for  a 
small  corporation  to  use  the  same  general  form  of  certificate 
for  both.  In  this  case,  the  word  "Preferred"  should  be 
printed  or  stamped  across  the  face  of  the  preferred  stock 
certificate.  Such  a  certificate  is  imperfect,  however,  as  the 
conditions  under  which  preferred  stock  is  issued  should 
appear  on  the  face  of  the  certificate. 

Stock  certificates  are  usually  prepared  in  books  of  from 
100  to  500  certificates,  with  a  stub  for  each  certificate. 
Large  corporations  whose  stockholders  run  up  into  the 
thousands  must,  of  course,  use  a  number  of  these  stock 
certificate  books.  Separate  books  for  common  and  pre- 
ferred stock  are  generally  used,  though  in  small  companies 
both  forms  of  certificates  might  be  bound  up  in  the  one  book. 

In  case  of  transfer  of  stock,  a  new  certificate  should  not 
be  issued  until  the  old  certificate  has  been  assigned  and 
returned  for  cancellation. '  It  is  customary  to  paste  the 
cancelled  certificate  to  its  original  stub. 


62    CORPORATION  RECORDS  AND  ACCOUNTS 


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BOOKS    AND    RECORDS 


63 


No.  15  Incorporated  under  the  Laws  of  10  Shares 

The  State  of  New  Jersey 

The  Ventnor  Stove  Company 

Capital  Stock $150,000 

Common  Stock  $100,000  Preferred  Stock  $50,000 

Full-Paid  and  Non-Assessable 

This  Is  to  Certify,  that  George  Bower  is  the  owner  of  Ten  Shares 
of  the  Preferred  Stock  of  The  Ventnor  Stove  Company,  transferable 
only  on  the  books  of  the  Company  by  the  said  owner,  in  person  or  by 
duly  authorized  attorney,  upon  surrender  of  this  certificate  properly 
indorsed. 

The  holder  of  the  preferred  stock  represented  by  this  certificate  is 
entitled  to  an  annual  dividend  of  Six  Per  Cent  (6%),  payable  out  of 
the  net  profits  of  the  Company  before  any  dividend  is  paid  upon  the 
common  stock.  Should  the  net  profits  in  any  year  be  insufficient  to 
pay  said  preferred  dividend,  either  in  whole  or  in  part,  any  unpaid 
portion  thereof  shall  become  a  charge  against  the  net  profits  of  the 
Company,  and  shall  be  paid  in  full  out  of  said  net  profits  before  any 
dividends  are  paid  upon  the  common  stock. 

In  event  of  the  dissolution  of  the  corporation  from  any  cause, 
holders  of  preferred  stock  shall  be  paid  from  the  assets  to  the  par 
value  of  their  stock  and  all  arrearages  of  dividends  before  anything 
is  paid  to  the  holders  of  common  stock. 

Said  preferred  stock  is  subject  to  redemption  at  the  option  of  the 
Company  at  any  time  after  Ten  (10)  Years  from  the  first  day  of 
August,  1916,  upon  payment  of  One  Hundred  and  Five  Dollars  ($105) 
per  share  and  any  accumulated  dividends. 

Said  preferred  stock  is  not  entitled  to  vote  at  stockholders'  meetings 
of  the  Company,  nor  to  participate  in  profits  beyond  its  fixed,  prefer- 
ential, cumulative,  annual  dividend  of  Six  Per  Cent. 
,  Witness  the  Seal  of  the  Company  and  the  signatures 

)     ^S^L^^f  of  its  duly  authorized  officers  this  second  day  of 

April,  1916. 

W.  H.  Wilkinson,  Andrew  W.  Simpson, 

Treasurer  President 

Shares,  $100  each 


Stock  Certificate,  Preferred — {Stub  omitted) 


64    CORPORATION  RECORDS  AND  ACCOUNTS 

§  6i.    Assignment  of  Stock  Certificate 

When  stock  is  to  be  transferred,  the  form  of  assign- 
ment which  appears  on  the  back  of  the  certificate  is  signed 
by  the  transferor.  It  is  then  witnessed,  and  the  certificate 
is  usually  handed  to  the  new  owner  with  the  remaining 
blanks  of  the  assignment  unfilled.  This  is  called  an  "assign- 
ment in  blank,"  and  the  equitable  title  to  the  stock  then 
vests  in  the  holder  of  the  certificate,  as  the  name  of  an 
assignee  is  not  filled  in.  But  since  no  transfer  has  been 
made  on  the  books  of  the  corporation,  the  legal  title  remains 
in  the  former  owner,  who  is  still  the  owner  of  record,  i.e., 
the  owner  as  shown  by  the  books  of  the  corporation,  and  is 
therefore  technically  entitled  to  exercise  all  the  rights  of 
ownership. 

For   Value   Received,    I   hereby   sell,    assign    and   transfer    unto 

of   

shares  of  the  capital  stock  represented  by  the 

within  certificate,   and   do  hereby  irrevocably  constitute   and   appoint 

my  Attorney  to  transfer  the  said 

stock  on  the  books  of  the  within-named  Company,  with  full  power  of 
substitution  in  the  premises. 

Joseph  A.  Longstreet 

Dated 19. . . .. 

In  presence  of 


Assignment  of  Stock  Certificate 


As  long  as  the  assignment  on  the  certificate  is  left  blank, 
the  certificate  may  be  passed  from  hand  to  hand  without 
further  formality  as  to  assignment,  and  carries  with  it  the 
equitable  title  to  the  stock  it  represents.  Whenever  the 
owner  of  the  assigned  certificate  wishes  to  have  the  stock 
transferred  to  himself  on  the  books  of  the  corporation,  i.e., 
put  in  his  own  name,  he  surrenders  the  certificate  to  the 
proper  officer  of  the  corporation — usually  the  secretary — 


BOOKS    AND    RECORDS 


65 


with  instructions  as  to  reissue  of  the  stock.  He  may,  if  he 
wishes,  fill  in  the  blanks  in  the  assignment  on  the  back  of 
the  certificate  before  surrendering  it,  but,  if  not,  the  blanks 
are  filled  in  by  the  officer  of  the  corporation,  usually  with 
his  own  name,  and  the  attorney  thus  named  in  the  assign- 
ment signs  the  transfer  book — if  one  is  kept.  After  the 
transfer  has  been  recorded,  a  new  certificate  is  issued  to  the 
new  owner  of  record  in  accordance  with  his  instructions. 

Frequently  the  holder  of  a  certificate  for  a  number  of 
shares  desires  to  transfer  part  of  them,  in  which  case  his 
certificate  is  cancelled,  a  new  one  is  made  out  to  him  for 
the  number  of  shares  still  remaining  to  his  credit,  and  a 
new  certificate  is  also  made  out  in  favor  of  the  transferee 
for  the  number  of  shares  transferred.  Sometimes,  on  the 
other  hand,  a  stockholder  desires  to  surrender  a  certificate 
and  take  in  exchange  two  or  more  certificates,  each  for  a 
smaller  number  of  shares.  This  is  called  a  "split."  Or, 
sometimes  several  certificates  of  smaller  amounts  are  sur- 
rendered in  exchange  for  a  single  certificate.  This  also 
is  known  as  a  "split." 

In  any  of  these  cases,  the  certificates  must  be  assigned 
as  required  by  the  conditions,  and  the  proper  records  must 
be  made  in  the  transfer  book,  in  the  transfer  register,  and 
in  the  stock  certificate  book;  the  cancelled  certificates  being 
pasted  back  on  their  own  stubs  at  the  time  the  new  issue 
is  made.  In  such  cases,  the  stock  assignment  and  the  trans- 
fer book  state  that  the  new  stock  certificates  are  to  be  made 

out  "  to  myself,"  or  "to  myself .shares,  and  to 

.shares,"  as  the  case  may  be 

Stock  brokers  often  have  continuing  powers  of  attorney 
from  those  for  whom  they  act,  to  transfer  the  stocks  which 
come  into  the  possession  of  these  brokers  in  the  course  of 
business.  On  the  other  hand,  large  corporations  generally 
appoint  a  special  transfer  agent  or  registrar,  or  both,  to 


66    CORPORATION  RECORDS  AND  ACCOUNTS 

look  after  the  transfer  and  issue  of  stock  certificates.  A 
trust  company  is  usually  appointed  to  perform  such  duties. 
In  such  case  the  trust  company  countersigns  all  certificates 
issued,  and  supervises  all  other  matters  pertaining  to  the 
company's  stock. 

§  62.    Stock  Transfer  Book 

The  transfer  book  both  authorizes  and  records  the 
transfers  of  shares  of  stock  of  the  corporation.  It  is,  as  to 
its  wording,  practically  a  duplication  of  the  assignment 
ordinarily  appearing  on  the  back  of  every  stock  certificate. 
By  many  corporations  the  stock  transfer  book  is  not  kept 
at  all,  since  the  duly  executed  assignment  on  the  back  of 
the  certificate  is  regarded  as  sufficient  authorization  for  the 
transfer  of  the  assigned  stock. 

The  form  of  transfer  book  is  usually  about  as  follows : 

Ledger  Folio  29  Transfer    No.  326 

Goodwin  Auto  Car  Company 

For  Value  Received,  I  hereby  sell,  assign,  and  transfer  unto  James 
W.  Strong  of  Trenton,  New  Jersey,  Fifty  Shares  of  the  Capital  Stock 
of  the  above-named  Company,  now  standing  in  my  name  on  the  Com- 
pany books  and  represented  by  surrendered  Certificates  Nos.  32,  37, 
and  44. 

Witness  my  hand  and  seal  this  20th  day  of  March,  1916. 

Thomas  L.  Borden  [l.s.] 
By  Henry  Strong, 
Attorney 
New  Certificate  No.  196 
Issued  to  James  W.  Strong 
Ledger  Folio  No.  72 

Stock  Transfer  Book 

This  form  remains  in  the  book  and  is  evidence  of 
authority  of  transfer.  A  record  of  all  transfers  is  thus 
secured  in  one  book,  from  which  postings  can  be  made  and 
tp  which  reference  may  be  had  at  any  time.     The  book 


BOOKS    AND    RECORDS 


67 


usually  contains  from  two  to  six  transfer  forms  on  each 
page,  one  below  the  other.  Transfer  books  are  frequently- 
prepared  with  stubs,  but  these  stubs  are  not  necessary  and 
may  be  left  blank,  as  the  transfers  are  not  torn  out. 

It  is  usual  to  close  the  transfer  books  a  certain  number 
of  days  before  the  annual  meeting  and  before  dividend  days ; 
and  during  these  periods  stock  cannot  be  transferred  on 
the  corporate  records.  This  "closing  of  the  transfer  books" 
merely  amounts  to  a  refusal  of  the  officials  in  charge  of  the 
stock  books  to  register  transfers  of  stock  for  the  stated 
number  of  days  before  the  annual  meeting  or  before  the 
day  appointed  for  the  payment  of  dividends.  The  registered 
holder  on  the  date  when  the  transfer  books  are  closed  is 
therefore  the  person  who  is  technically  entitled  to  vote  at 
the  next  stockholders'  meeting  or  to  participate  in  the 
dividends,  even  though  he  may  have  sold  his  stock  mean- 
while. In  any  such  case,  the  purchaser  must  look  to  the 
seller  for  any  voting  and  dividend  rights  to  which  he  is 
entitled  because  of  the  stock  he  purchased.      (See  §  36.) 

§  63.     Register  of  Transfers 

Sometimes  another  book — the  register  of  transfers — is 
used  in  addition  to  the  transfer  record  mentioned  above. 
In  such  case  this  book  serves  as  a  convenient  medium 
through  which  postings  are  made  to  the  stock  ledger.  It 
is  apparent,  of  course,  that  for  every  stock  certificate  trans- 
ferred, a  debit  must  be  made  to  the  transferor  and  a  credit 
to  the  transferee. 

A  transfer  register  is  required  only  in  a  large  corpora- 
tion where  many  transfers  are  being  made.  In  a  small 
company  where  the  stock  is  inactive,  it  is  not  necessary ;  and 
postings  may  then  be  made  from  the  transfer  book  or  even 
from  the  stock  certificate  book.  The  following  is  a  simple 
form  of  transfer  register : 


68 


CORPORATION  RECORDS  AND  ACCOUNTS 


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BOOKS    AND    RECORDS 


69 


When  a  trust  company  acts  as  transfer  agent,  it  is 
customary,  as  already  stated,  to  have  all  certificates  counter- 
signed by  the  transfer  agent  after  they  have  been  signed  by 
the  president  and  treasurer  of  the  corporation  which  issues 
the  stock.    The  form  of  countersignature  is  about  as  follows : 

Countersigned  this  21st  day  of  May,  1916. 

Acme  Trust  Company  of  New  York, 

Transfer  Agent 

By  Joseph  H.  Wilson, 
Auditor 

§  64.    Stock  Register 

This  book  is  used,  in  addition  to  the  stock  transfer  book, 
for  the  registration  of  stock  in  cases  where  a  registrar  of 
stock  is  deemed  necessary.  The  registrar  is  generally  a 
bank  or  trust  company.  By  having  the  issue  of  all  stock 
supervised  by  the  registrar,  provision  is  made  against 
irregular  issues  or  overissues  of  certificates.  The  number 
of  shares  legally  authorized  to  be  issued  is  recorded  on  this 
register  and  should  exactly  equal  the  number  of  outstanding 
shares,  plus  any  authorized  shares  not  yet  actually  issued 
by  the  corporation. 

The  rules  of  the  New  York  Stock  Exchange  require 
every  company  whose  shares  are  dealt  in  on  the  Exchange 
to  have  an  independent  registrar  approved  by  the  Exchange. 

Each  new  certificate  issued,  whether  original  or 
transfer,  must  be  countersigned  by  the  registrar,  about  as 
follows : 

Registered  this  .......  day  of 191 . . 

Business  Trust  Company,  Registrar 

By 


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CORPORATION  RECORDS  AND  ACCOUNTS 


THE  VENTNOR  STOVE  COMPANY 

Authorized  Shares,  Common  I.OOO  -  Preferred  500 
Capital  Stock    ^  150.000  Shares  ^100  each. 

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BOOKS    AND    RECORDS 


71 


§  65.    Stock  Book  or  Stock  Ledger 

Some  form  of  stock  book,  stock  ledger,  or  share  ledger 
— which  are  practically  one  and  the  same — must,  in  most 
states,  be  kept  as  a  matter  of  statutory  requirement.  The 
stock  ledger  is  primarily  intended  to  show  the  stock  acquired, 
any  transferred,  and  the  number  of  shares  held  at  the  time 
by  each  stockholder;  but  it  is  sometimes  also  used  as  a 
stockholders  ledger  to  show  payments  made  on  account  of 
subscriptions.  This  record  is  better  kept  in  a  separate 
stockholders  ledger.  It  is  obvious  that  the  great  majority 
of  the  stock  ledger  entries  are  transfers  of  stock  in  which 
the  corporation  has  no  financial  interest;  and  the  financial 
side  of  the  comparatively  few  original  entries  in  which  it  is 
interested  should  not  be  brought  into  this  book. 

The  stock  ledger  is  the  proper  legal  evidence  (§§  14, 
15)  of  the  ownership  of  stock  in  a  corporation.  A  stock 
certificate  may  be  lost  or  destroyed,  or  may,  in  case  of  fraud 
or  error,  appear  under  a  different  name,  but  the  stock  book 
still  assures  to  the  "stockholder  of  record"  his  corporate 
rights  and  privileges.  Stockholders  have  the  right  to  inspect 
the  stock  book  at  reasonable  times  and  to  take  extracts  there- 
from if  desired — a  privilege  which  is  manifestly  liable  to 
abuse  if  not  properly  restricted. 

The  stock  ledger  records  the  name  and  address  of  each 
stockholder,  the  number  of  shares  issued  to  him,  any  shares 
subsequently  acquired,  any  shares  transferred,  and  the  bal- 
ance of  shares  remaining  to  his  credit.  It  also  shows  the 
numbers  of  the  certificates  issued  to  the  individual,  the  num- 
bers transferred,  and  the  date  of  each  transaction.  Postings 
to  the  stock  ledger  are  made  from  the  subscription  lists  or 
blanks,  or,  in  the  absence  of  these  in  the  case  of  original 
issues,  from  the  stock  certificate  book.  Transfers  of  stock 
are  posted  from  the  transfer  book,  transfer  register,  or  stock 
certificate  book,  to  the  proper  accounts  in  the  stock  ledger. 


72    CORPORATION  RECORDS  AND  ACCOUNTS 

Preferred  stock  should  be  recorded  in  a  separate  stock 
book,  or  in  its  own  section  of  the  stock  ledger;  for  it  is 
obvious  that  the  attempt  to  keep  a  record  of  both  kinds  of 
stock  in  one  account  would  lead  to  confusion. 

A  capital  stock  account  is  sometimes  opened  on  the  front 
page  of  the  stock  ledger,  and  debited  with  the  aggregate 
amount  of  shares  credited  to  the  stockholders'  accounts. 
This  pyrovides  a  double  entry  for  the  stock  ledger,  and 
enables  the  secretary  to  tell  at  any  time  the  amount  of  stock 
outstanding.  The  stock  ledger  must,  of  course,  agree  as 
to  totals  with  the  capital  stock  account  in  the  general  ledger ; 
or,  if  the  stock  is  not  all  issued,  with  the  capital  stock  account 
less  all  unissued  stock. 

§  66.    Form  of  Stock  Book  or  Stock  Ledger 

There  is  no  generally  accepted  form  of  stock  book,  or 
stock  ledger,  save  in  some  few  states  (as  New  York)  where 
its  form  is  prescribed  by  law.  In  most  of  the  states,  there- 
fore, the  secretary,  or  the  accountant  who  has  charge  of  the 
corporate  accounting  system,  must  decide  its  form  and  the 
method  of  entry.  As  a  matter  of  fact,  the  accountant  usually 
uses  the  form  available  at  the  stationery  store  or  supply 
house  with  which  he  deals. 

It  must  always  be  kept  in  mind  that  the  great  object  of 
the  stock  book  is  to  show  at  any  time  the  number  of  shares 
then  standing  in  the  stockholder's  name — not  the  amounts 
paid  on  these  shares,  nor  their  par  value,  but  the  number 
of  shares.  In  practice  there  are  two  methods  of  keeping 
this  record.  In  some  forms  the  stockholders'  accounts  are 
debited  for  stock  purchased,  and  credited  for  stock  sold; 
while  in  others  the  stockholders'  accounts  are  credited  when 
stock  is  purchased,  and  debited  when  it  is  sold.  As  the 
book  is  not  part  of  the  general  accounting  system,  this 
variation  is  not  a  matter  of  importance  so  long  as  the  details 


BOOKS    AND    RECORDS 


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74 


CORPORATION  RECORDS  AND  ACCOUNTS 


are  correctly  recorded  and  full  information  obtainable.  The 
important  point  is  for  the  record  to  show  at  a  glance  the 
balance  of  stock  owned  by  each  stockholder. 

In  many  cases  the  stockholders'  accounts  are  ruled  in  the 
regular  ledger  form  (as  shown  in  the  following  form), 
which  serves  the  purpose  very  well  so  long  as  the  stock  is 
fully  paid  and  but  few  transfers  are  made.  It  is  apparent, 
however,  that  in  large  companies,  where  transfers  are 
numerous  and  the  accounts  of  stockholders  are  constantly 
changing,  a  more  complete  record  is  desirable  and  even 
essential. 


Ralph  Moore,  1439  Chestnut  Street 


1916 

May 


1916 

To  John  Kane, 

May 

I 

20  shares 

$2,000 

00 

Balance,    70 

" 

2 

shares    

7,000 

00 

00 

$9,000 

= 

May 

4 

50  shares,  orig- 
inal    

40  shares,  orig- 
inal    


Balance,  70 
shares       . . . . 


$5,000 
4,000 


$9,000 


$7,000 


00 

00 


00 


Stock  Ledger  Account 


The  stock  book  may  be  either  bound,  loose-leaf,  or  in 
card  form.  The  forms  of  stock  book  which  follow  are  in 
general  use. 

The  form  shown  may  be  readily  changed  to  meet  any 
special  requirements.  The  leaves  of  the  stock  book  are 
indexed,  usually  as  a  matter  of  convenience,  but  in  some 
states  to  secure  the  alphabetical  arrangement  required  by 
statute.  The  name  and  address  of  the  stockholder  with 
whom  the  particular  account  is  kept  appears  at  the  head  of 
the  page  as  in  an  ordinary  ledger.  On  the  right-hand  side 
of  the  page  the  party  is  credited  with  the  stock  he  purchases 
or  otherwise  acquires ;  and  on  the  left-hand  side  he  is  debited 


BOOKS    AND    RECORDS 


75 


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76    CORPORATION  RECORDS  AND  ACCOUNTS 

with  any  stock  disposed  of.  The  difference  between  the 
two  sides  shows  at  any  time  the  amount  of  stock  standing 
to  his  credit. 

Where  a  number  of  certificates  are  issued  or  cancelled 
in  a  single  transaction,  the  entry  will  vary  according  to  the 
conditions.  If  but  a  few  certificate  numbers  are  involved, 
they  may  usually  be  entered  in  small  figures  on  the  line  in 
the  proper  column.  If  the  numbers  are  too  many  to  be 
entered  in  this  way,  two  or  more  lines  may  be  devoted  to 
the  transaction ;  or  the  numbers  may  be  noted  at  the  bottom 
of  the  page,  reference  to  these  numbers  being  inserted  in 
the  column  where  the  numbers  ordinarily  appear.  How- 
ever, if  the  certificates  cancelled  or  issued  are  in  different 
names,  one  line  must  necessarily  be  given  for  each  certificate. 

In  New  York  a  special  form  of  stock  book  has  been 
prescribed  by  the  State  Comptroller,  acting  under  authority 
given  him  by  law.  The  use  of  this  form  by  New  York 
corporations  is  obligatory.  The  forms  on  page  75  show, 
respectively,  stock  book  prescribed  for  the  use  of  brokers, 
and  the  stock  book  for  corporations  and  transfer  agents. 
The  only  new  feature  in  these  prescribed  forms  is  the  intro- 
duction of  the  special  columns  for  the  record  of  the  stamp 
tax  paid  on  transfers. 

§  67.    Dividend  Book 

This  book,  used  only  when  dividends  are  declared,  con- 
tains a  list  of  the  stockholders  who  are  entitled  to  participate 
in  these  dividends.  It  may  be  a  bound  book  or  simply  loose 
sheets  fastened  together  in  a  binder.  After  the  stock  books 
are  closed  for  dividends,  the  registered  holders  of  stock  are 
recorded  in  this  book  in  alphabetical  order  with  all  the 
necessary  data  against  each  name. 

Most  corporations  pay  dividends  by  check,  and  many 
of  them  open  special  bank  accounts  for  dividend  purposes. 


BOOKS    AND    RECORDS 


11 


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78 


CORPORATION  RECORDS  AND  ACCOUNTS 


In  this  case,  the  total  amount  of  the  dividend  to  be  paid 
out  is  deposited,  and  specially  printed  checks  are  drawn 
against  it  in  favor  of  the  stockholders  for  the  dividends  due. 
Since  these  checks  specify  the  number  and  date  of  the  divi- 
dend as  well  as  the  amount,  they  serve  as  vouchers  and  do 
not  require  an  acknowledgment.  A  convenient  form  of 
dividend  book  is  shown  on  page  'j'j.  A  form  of  dividend 
check  and  of  the  notice  usually  accompanying  it  are  as 
follows : 


Q 
Q 


Q 

u  2 

O  "^ 
H  d 

Q 

W 
Pi 
OS 

w 

to 


Great  Western  Milling  Company 

Portland,  Oregon,  June  5,  1916  No.  2438 

First  National  Bank 
of  Portland,  Oregon 

Pay  to  the  order  of 

James  D.  Moore $150.00 

One  Hundred  and  Fifty  00/100 Dollars 

Countersigned:  George  H.  Seymour, 

Stock  Transfer  Department,  Treasurer 

John  Fiske,  Transfer  Agent 

Dividend  Check 


Great  Western  Milling  Company 

Portland,  Oregon 

June  S,  1916 
On  May  6,  1916,  the  Directors  declared  quarterly  dividend  No.  10 
of  One  and  One-half  Per  Cent  upon  the  Preferred  Stock  of  the  Com- 
pany, payable  this  day  to  stockholders  of  record  of  May  16,  1916. 

In  accordance  with  permanent  order  on  file,  enclosed  please  find 
check  for  above  dividend  on  the  Preferred  Stock  standing  in  your 
name.    No  acknowledgment  is  necessary. 

Kindly  advise  Charles  E.  Howe,  Assistant  Treasurer,  282  Wash- 
ington Street,  Portland,  Oregon,  of  any  change  in  your  address,  giving 
your  old  address  as  well  as  the  new. 

George  H.  Seymour, 

Treasurer 
Dividend  check  enclosed  which  please  cash  immediately. 
Notice  Accompanying  Dividend  Check 


BOOKS    AND    RECORDS 


79 


§  68.    Dividend  Order 

The  larger  corporations  usually  require  their  stock- 
holders to  file  orders  giving  definite  instructions  as  to  the 
payment  of  dividends.  In  most  cases,  dividends  go  to  the 
stockholder  of  record,  but  a  stockholder  sometimes  desires 
all  or  a  part  of  the  dividends  upon  his  shares  to  be  paid 
to  some  other  person,  or  to  a  bank  or  trust  company.  A 
simple  form  of  permanent  dividend  order  frequently  used 
is  as  follows : 


Q    ">    . 

Q  ^  2 

•J       V) 


in    01 


> 

Q 


H    c   <j 
2  ^  j: 

<   ^  ^ 


(date  here) 191 . . 

TREASURER 

Until  this  order  is  revoked  in  writing,  please  remit 
by  mail,  to  the  address  as  per  margin,  by  check 
drawn  to  order  of 

all  dividends  now  due,  or  which  may  hereafter  be 
declared,  on  shares  of  the  Capital  Stock  of  your 
Company  now  or  hereafter  standing  in  the  name  of 

WITNESS  : 

(Give  name  exactly  as  it  appears  on  stock  certificate) 
(Shareholder  sign  here) 


When  the  check  is  to  be  made  payable  to  another  person,  have 
signature  acknowledged  before  a  notary  public. 


CHAPTER    VI 


DISTINCTIVE    CORPORATE   ACCOUNTS 


§  69.    Accounts  Peculiar  to  Corporate  Bookkeeping 

As  has  been  stated,  there  are  certain  accounts  peculiar 
to  corporation  accounting,  or  so  rarely  used  outside  of  it, 
as  to  be  distinctive.  In  the  present  chapter  an  analysis  of 
the  more  important  of  these  accounts  is  given  in  ledger 
form,  with  respective  debits  and  credits  appearing  upon  the 
proper  side  of  each  account.  The  journal  entries  through 
which  the  component  parts  of  these  accounts  are  brought 
upon  the  books  are  more  fully  discussed  in  following 
chapters. 

It  should  be  noted  that  there  is  some  diversity  of  opinion 
as  to  the  accounts  and  entries  that  are  best  employed  under 
the  varying  conditions  that  confront  the  corporation  ac- 
countant. In  any  case,  however,  that  plan  seems  best  which 
will  provide  all  of  the  information  desired  with  the  fewest 
possible  repetitions.  The  present  chapter  is  designed  to  cover 
all  the  accounts  used  in  ordinary  corporation  accounting. 

§  70.    Capital  Stock — Common 


Debit: 

Credit: 

With   the   par   value   of   any 

With  the  par  value  of  com- 

common shares  retired. 

mon  shares  issued;  or 

With    the    entire    authorized 

value  in  case  an  Unissued  Stock 

account  is  opened. 

When  no  preferred  stock  is  issued — in  which  case  but 

80 


DISTINCTIVE    CORPORATE    ACCOUNTS  8 1 

one  kind  of  stock  is  issued — the  foregoing  account  will  be 
known  simply  as  "Capital  Stock,"  to  which  the  above  rules 
will  apply  without  change. 

If  an  Unissued  Stock  account  is  not  opened,  the  balance 
of  the  Capital  Stock  account  represents  the  par  value  of 
common  stock  issued  and  outstanding.  The  stock  ledger 
(§§  65,  66)  will  also  show  the  stock  issued  and  outstand- 
ing, though  ordinarily  in  shares  and  not  in  value.  If  the 
par  value  of  the  stock  acquired  by,  and  disposed  of  by  the 
stockholders  is  also  entered  in  the  stock  ledger,  it  may  then 
be  operated  as  a  subsidiary  record,  the  Capital  Stock  account 
becoming  the  controlling  account. 

If  an  Unissued  Stock  account  is  opened,  the  balance  of 
the  Capital  Stock  account  shows  the  total  authorized  stock, 
while  the  balance  of  the  Unissued  Stock  account  shows  the 
amount  still  unissued. 

The  Capital  Stock  accounts  as  above  constituted  show 
the  amount  of  capital  invested  in  the  corporation  by  the 
stockholders  (who  are  the  real  owners),  very  much  as  the 
Capital  account  of  a  partnership  or  sole  proprietorship  busi- 
ness shows  the  investment  of  the  partners  or  proprietor. 
The  accounts  represent  a  nominal  liability  to  creditors  and 
to  the  stockholders,  whose  claims  in  the  event  of  liquidation 
are  considered  only  after  all  secured  and  unsecured  creditors 
are  satisfied.     (See  also  Chapter  VII,  and  §§   144,  166.) 

§  71.    Capital  Stock — Preferred 


Debit: 

With  the  par  value  of  pre- 
ferred shares  retired. 


Credit : 

With  the  par  value  of  pre- 
ferred shares  issued;  or 

With  the  entire  authorized 
value  in  case  an  Unissued  Stock 
account  is  opened  for  preferred 
stock. 


82 


CORPORATION  RECORDS  AND  ACCOUNTS 


The  balance  of  this  account  represents  the  par  value  of 
preferred  stock  issued  and  outstanding,  or  of  the  total  pre- 
ferred stock  authorized,  as  the  case  may  be.  If  the  latter, 
the  Unissued  Stock — Preferred  account  will  show  the 
amount  of  preferred  stock  still  unissued. 


§  72.    Capital  Stock  Authorized 


Debit: 

With  the  par  value  of  shares 
disposed  of,  the  corresponding 
credit  being  made  to  Capital 
Stock  or  to  Capital  Stock  Sub- 
scribed. 


Credit : 

With  the  par  value  of  shares 
authorized,  the.  corresponding 
debit  being  made  to  Unissued 
Stock. 


This  account  when  used  shows  a  credit  balance,  indicat- 
ing the  par  value  of  stock  authorized  and  not  yet  disposed 
of.  It  is  sometimes  opened  in  order  to  bring  onto  the  books 
at  the  time  of  organization  the  entire  amount  of  capital 
stock  authorized  by  charter,  regardless  of  whether  or  not 
any  portion  thereof  has  been  disposed  of.  A  separate  ac- 
count should  be  opened  for  each  class  of  stock,  the  corre- 
sponding debit  to  Unissued  Stock  account  having  a  like 
classification. 

This  is  a  favorite  account  with  many  bookkeepers  and 
accountants,  but  so  long  as  the  Unissued  Stock  account  in- 
dicates the  amount  of  stock  authorized  and  unsold,  there 
seems  little  need  of  another  account  to  exhibit  the  same 
information.  The  account  has  some  merit,  however, 
especially  in  affording  a  means  of  recording  a  neutral  open- 
ing entry  in  the  corporate  books,  and  in  exhibiting  by 
ledger  accounts  the  amounts  of  capital  stock  both  sold  and 
unsold.     (See  also  §§  97,  154.) 

Undoubtedly  most  accountants  credit  Capital  Stock  ac- 
count at  the  beginning   for   either  the  entire   authorized 


DISTINCTIVE    CORPORATE    ACCOUNTS 


83 


capital  stock  or  for  the  amount  issued,  and  in  such  case 
the  Capital  Stock  Authorized  account  would  not  be 
required. 


§  73.    Unissued  Stock* 


Debit: 

With  the  par  value  of  shares 
authorized,  the  offsetting  credit 
being  made  to  Capital  Stock  or 
to  Capital  Stock  Authorized. 


Credit: 

With  the  par  value  of  shares 
subscribed,  the  offsetting  debit 
being  made  to  Cash,  to  the 
proper  property  account,  or  to 
Subscriptions  to  Stock,  as  the 
case  may  be. 


This  account,  also  known  as  Unsubscribed  Stock,  shows 
at  any  time  the  par  value  of  shares  of  a  corporation  author- 
ized by  charter  but  not  yet  subscribed  and  paid  for.  It 
shows  a  debit  balance  indicating  the  amount  of  stock  still 
unissued,  and  is  a  negative  to  Capital  Stock  account,  or 
to  Capital  Stock  Authorized  account  in  case  the  latter  is 
opened.  It  must  be  borne  in  mind  that  instalment  subscrip- 
tions, until  they  are  fully  paid,  are  carried  in  Capital  Stock 
Subscribed  account  when  that  account  is  used,  and  do  not 
show  in  the  Capital  Stock  account  until  they  are  fully 
paid. 

Many  accountants  prefer  to  credit  Capital  Stock  with 
only  the  par  value  of  shares  sold,  in  which  case  Unissued 
Stock  account  is  not  needed;  and  yet  the  account  has  a 
mission  and  is  frequently  used.  On  the  balance  sheet,  how- 
ever, the  unissued  stock  is  preferably  deducted  from  the 
authorized  capital  stock  of  the  corporation  and  is  not 
shown  among  the  assets.  (See  also  Chapter  VII,  and 
§§  144,  166.) 


'Separate  account  for  each  class  of  stock  unissued. 


g4         CORPORATION    RECORDS    AND    ACCOUNTS 
§  74.    Subscriptions  to  Stock* 


Debit: 

With  the  amount  of  subscrip- 
tions for  capital  stock.  (At  this 
time  credit  Capital  Stock  Sub- 
scribed, Unissued  Stock,  Treas- 
ury Stock,  or  Capital  Stock  ac- 
count, as  the  case  may  be. 


Credit : 

With  all  moneys  received  to 
cover  subscriptions,  or  with  the 
amount  of  each  instalment  due 
by  subscribers  when  an  Instal- 
ment account  is  maintained. 


Subscriptions  to  Stock  account  shows  a  debit  balance,  if 
any.  Other  names  for  this  account  are  "Subscriptions," 
"Stock  Subscriptions,"  and  "Subscribers."  The  balance  is 
an  asset,  and — save  when  an  instalment  account  is  opened — 
represents  the  amount  due  and  unpaid  on  subscriptions  for 
capital  stock  sold  on  the  instalment  plan.  Debits  to  this 
account  are  offset  by  credits  to  Unissued  Stock,  Capital 
Stock  Subscribed,  or  Treasury  Stock  account,  as  the  case 
may  be,  or  even  to  Capital  Stock  account.  Sometimes  it  is 
opened  to  show  the  total  amount  of  stock  subscribed,  even 
though  payment  of  part  or  all  of  these  subscriptions  is  to 
be  made  in  full  at  once  or  in  a  short  time.  Subscriptions  to 
treasury  stock  should  preferably  be  opened  under  another 
heading,  such  as  "Subscriptions  to  Treasury,"  to  distinguish 
them  from  subscriptions  to  unissued  stock. 

A  subscription  ledger  should  be  kept  as  a  subsidiary 
record  to  the  Subscriptions  to  Stock  account,  and  an  account 
with  each  subscriber  kept  therein.  The  respective  sub- 
scribers' accounts  should  be  debited  separately  with  the 
amounts  of  the  subscriptions,  and  credited  with  the  amounts 
of  the  payments  which  they  make  on  account  of  the  sub- 
scriptions. The  results  of  a  trial  balance  taken  from  this 
subsidiary  ledger  should  agree  with  the  balance  of  the  Sub- 
scriptions to  Stock  account.  (See  also  §§  65,  66,  98-100, 
150.) 

'Separate  account  for  each  class  of  stock  sold. 


DISTINCTIVE    CORPORATE    ACCOUNTS 
§  75.    Capital  Stock  Subscribed* 


85 


Credit: 

With  the  par  value  of  capital 
stock  sold  on  the  instalment  or 
deferred  payment  plan.  (At  this 
time  debit  Subscriptions  to 
Stock  account.) 


Debit: 

With  the  par  value  of  sub- 
scriptions which  have  been  fully 
paid;  at  which  time  certificates 
of  stock  should  be  issued,  cover- 
ing the  number  of  shares  sub- 
scribed and  paid  for.  (At  this 
time  credit  Capital  Stock,  Un- 
issued Stock,  or  Treasury  Stock, 
as  the  case  may  be.) 


Sometimes  subscriptions  to  stock — especially  when  on 
the  instalment  plan — fail  after  they  are  made.  Stock  certifi- 
cates should  not  be  issued  to  subscribers  until  their  respec- 
tive subscriptions  have  been  paid  in  full.  Capital  Stock 
Subscribed  account  is  therefore  opened  as  a  suspense  ac- 
count in  which  subscriptions  may  be  carried  until  they  are 
I>aid  in  full. 

The  balance  of  Capital  Stock  Subscribed  account  is  a 
nominal  liability,  and  represents  the  par  value  of  each  sub- 
scription until  this  subscription  has  been  fully  paid — not  the 
amount  due  on  these  subscriptions,  which  is  shown  by  Sub- 
scriptions to  Stock  account,  but  the  total  original  par  value 
of  all  unpaid  subscriptions.  When  subscriptions  are  paid 
in  full  and  certificates  are  issued,  the  Capital  Stock  Sub- 
scribed account  is  debited  and  Capital  Stock  account  or  Un- 
issued Stock  account,  or  perhaps  Treasury  Stock  account,  is 
credited.  Instead  of  opening  this  account,  credits  for  stock 
subscribed  on  the  instalment  plan  are  frequently  made 
directly  to  Capital  Stock ;  or  it  is  omitted  entirely  in  case  a 
Capital  Stock  Authorized  account  is  opened. 

The  diflference  between  the  balance  of  Subscriptions  to 
Stock  account  and  the  balance  of  this  account  should  agree 


'Separate  account  for  each  class  of  stock  subscribed. 


86 


CORPORATION  RECORDS  AND  ACCOUNTS 


with  the  amount  of  cash  received  on  account  of  subscrip- 
tions not  fully  paid.  It  will  thus  be  seen  that  the  balance 
of  this  account  is  an  offset  to  the  cash  received  on  account 
of  subscriptions  not  fully  paid,  and  the  remaining  part  of  it 
is  an  offset  against  the  balance  of  the  Subscriptions  to  Stock 
account.     (See  also  §  97.) 


§  76.    Instalment  Account 


Debit: 

With  the  amount  of  instal- 
ments due  by  subscribers  to 
shares  of  stock,  the  offsetting 
credit  being  to  Subscriptions  to 
Stock  account,  or  Unissued 
Stock  account. 


Credit : 

With  payments  on  account  of 
instalment  subscriptions. 


This  account  is  employed  only  when  a  considerable 
amount  of  stock  has  been  subscribed — ^usually  at  the  time 
the  corporation  is  organized — and  payment  therefor  is  to 
be  made  in  instalments  in  fixed  amounts  and  at  fixed  times 
or  on  call. 

The  account  is  opened  afresh  each  time  an  instalment 
falls  due.  As  each  instalment  is  due  a  credit  is  made  to 
Subscriptions  to  Stock  and  a  debit  to  the  particular  instal- 
ment, as  "Instalment  No.  i,  25%,"  "Instalment  No.  2, 
25%,"  and  so  on,  as  the  case  may  be.  It  shows  a  debit 
balance  and  remains  open  only  until  payments  on  the  par- 
ticular instalment  are  made.  Sometimes  an  account  for 
"Subscribers"  is  opened  in  its  place,  and  even  an  account 
in  the  name  of  each  individual  subscriber  when  these  are 
not  too  numerous.  The  main  object  is  to  show  the  amounts 
subscribed  by  individuals,  when  the  instalments  are  due 
and  how  much,  and  the  amounts  paid  thereon.  (See  also 
§§  98-100,  150,  152.) 


DISTINCTIVE    CORPORATE    ACCOUNTS 
§  77.    Treasury  Stock 


87 


Debit: 

With  the  cost  price  of  capital 
stock  issued  by  a  corporation 
and  subsequently  purchased  by 
it. 

With  the  market  value  of 
shares  donated  to  the  treasury. 
If  such  stock  has  no  positive 
market  value,  the  transaction 
may  be  brought  on  the  books  by 
debiting  the  account  with  the 
par  value  of  the  shares  donated, 
Donation  account  being  credited. 


Credit : 

With  the  cost,  or  realized 
value,  as  the  case  may  be,  when 
shares  debited  to  this  account 
are  disposed  of;  in  other  words, 
with  the  value  at  which  the 
shares  disposed  of  were  charged 
to  this  account.  If  the  price 
actually  realized  was  more  or 
less  than  that  at  which  the 
stock  was  charged  to  this  ac- 
count, the  difference  is  credited 
or  debited,  as  the  case  may  be, 
to  Donation  account. 


The  balance  of  this  account  is  an  asset,  and,  save  in  the 
case  of  donated  stock,  should  represent  the  cost  of  treasury 
shares  owned.  (See  also  Chapter  VIII,  and  §§  27,  155, 
166.)  A  separate  account  is  sometimes  opened  for  Donated 
Stock  instead  of  Treasury  Stock.  This  caption  is  a  good 
one  and  easily  understood. 

§  78.    Donation  Account 


Debit: 

With  the  discount  on  donated 
stock  sold  below  the  value  at 
which  it  was  credited  to  this  ac- 
count, and  with  any  expense  in 
connection  with  such  sale. 

With  the  amount  transferred 
at  any  time  to  Profit  and  Loss 
or  to  Surplus,  as  a  result  of 
stock  donated. 


Credit : 

With  the  market  or  par  value, 
as  the  case  may  be,  of  corpora- 
tion stock  donated  back  to  the 
company  for  resale  to  provide 
working  funds,  the  offsetting 
debit  being  to  Treasury  Stock 
account. 

With  the  excess  when  do- 
nated stock  is  sold  for  more 
than  the  value  at  which  it  was 
credited  to  this  account. 


^ 


88    CORPORATION  RECORDS  AND  ACCOUNTS 

The  balance  of  this  account — also  known  as  Working- 
Capital  Donated  account — is  always  on  the  credit  side  and 
is  a  nominal  liability,  being  an  offset  to  Treasury  Stock 
account.  As  stock  is  sold  and  profit  made  thereby,  such 
profit,  after  deducting  any  expenses  connected  therewith, 
may  be  carried  to  Profit  and  Loss  or  to  Surplus,  or  else  be 
permitted  to  remain  in  Donation  account  until  all  of  the 
donated  stock  is  disposed  of.  It  may  then  be  closed  off  as 
suggested,  or  be  permitted  to  stand  as  a  credit  balance  to 
the  account.  It  is  a  profit  in  any  case,  which  should  be  kept 
as  a  permanent  reserve  and  not  paid  out  in  dividends.  In 
most  cases,  however,  it  eventually  finds  its  way  to  Surplus 
account.     (See  also  Chapter  VIII,  and  §§  2^,  155,  166.) 

§  79.    Premium  on  Capital  Stock 


Debit: 

With  any  transfer  from  this 
account  by  amortization  or 
otherwise,  to  Profit  and  Loss, 
Surplus,  or  any  other  account. 


Credit: 

With  the  sale  price  of  shares 
over  and  above  the  par  value 
thereof. 


'  The  credit  balance  of  this  account,  sometimes  called 
Capital  Surplus,  shows  the  amount  of  premium  not  yet 
written  off.  It  is  a  profit  to  the  corporation,  but  not  one 
that  should  be  used  for  the  payment  of  dividends.  The 
preferable  way  is  to  amortize  it  over  a  term  of  five  or  ten 
years  by  yearly  or  monthly  credits  to  Profit  and  Loss.  It 
is  frequently  carried  as  a  permanent  credit  to  Surplus 
account,  especially  in  banks  and  other  corporations  where  it 
is  the  practice  to  sell  stock  at  a  premium  even  at  the  time 
of  organization.      (See  also  §§  103,  104-)  >/ 

If  stock  should  be  sold  at  a  discount — a  dubious  pro- 
ceeding— an  account  called  Stock  Discount  account  may  be 
opened.     (See  §  102.) 


DISTINCTIVE    CORPORATE    ACCOUNTS 
§  80.    Capital  Stock  Without  Par  Value 


89 


Debit: 

With  number  of  shares  re- 
tired, at  the  price  at  which  they 
were  credited  to  this  account 
when  sold. 


Credit : 

With  number  of  shares  is- 
sued, at  the  sale  price  thereof. 
The  corresponding  debit  is  to 
Cash,  to  the  proper  property  ac- 
count, or  to  Subscriptions  to 
Stock,  as  the  case  may  be. 

With  subsequent  sales  of 
stock,  at  the  sale  price  thereof. 


This  account  shows  a  credit  balance  and  is  a  nominal 
liability  representing  the  outstanding  capital  stock  of  the 
corporation,  provided  there  is  no  other  kind  of  stock  issued. 
There  being  no  par  value  to  the  shares  of  stock,  each  share 
represents  a  fractional  part  of  the  net  worth  (composed  of 
capital  and  surplus),  in  proportion  to  the  total  number  of 
shares  issued.  The  account  is  preferably  credited  with 
shares  at  the  sale  price  regardless  of  prices  which  preceded ; 
though  some  advocate  crediting  the  account  at  one  price 
for  all  sales  of  stock,  and  crediting  any  amount  received  in 
excess  thereof  to  Surplus  or  Stock  Premium  account.  So 
long  as  this  is  the  only  class  of  stock  issued,  however,  it 
matters  little,  so  far  as  the  book  value  of  the  shares  is  con- 
cerned, whether  such  premium  be  credited  to  Capital  or  to 
Surplus  account ;  and  yet  good  practice  favors  the  plan  out- 
lined above,  so  that  only  earned  profits  are  permitted  to 
appear  in  the  Surplus  account.  In  any  case,  the  share  value 
as  between  the  shares  would  be  the  same,  each  being  a 
proportionate  part  of  the  net  worth. 

Certificates  of  stock  without  par  value  simply  indicate 
the  undivided  interest  of  the  holder  in  the  net  worth  of 
the  corporation,  according  to  the  number  of  shares  hefd. 
The  balance  sheet,  in  addition  to  stating  the  capital  and 
surplus  of  the  concern,  should  state    (either  in  the  body 


90 


CORPORATION  RECORDS  AND  ACCOUNTS 


thereof  or  as  a  footnote  thereto)  the  number  of  shares  and 
perhaps  the  amount  paid  in  on  each  of  the  shares  outstand- 
ing, thus  giving"  a  ready  means  for  determining  the  sale 
price  and  the  book  value  of  each  unit  of  interest. 

If  there  be  more  than  one  class  of  stock  outstanding, 
each  class  has  its  own  status  in  relation  to  the  entire  capital 
stock.  Preferred  stock,  after  receiving  its  required  divi- 
dend, may  or  may  not  be  entitled  to  a  share  of  any  further 
distribution  of  profits;  likewise,  common  stock  both  with 
and  without  par  value  may  be  issued,  so  that  the  status  of 
each  must  be  prescribed  in  the  charter  or  the  by-laws  of  the 
corporation. 

The  following  balance  sheet  indicates  the  distinction 
between  7%  cumulative  preferred  stock  and  common  stock 
without  par  value. 

Balance  Sheet 

Condensed  Balance  Sheet  of  the  Aetna  Explosives  Co.,  Inc., 

AND  Subsidiary  Companies  as  of  March  31,  1916 


Assets 

Liabilities 

Commercial  Plants  and 

Common  Stock,  no  par 

Properties   

$2,970,522 

value;   on  which  has 

Munition    Plants    and 

been   paid    in   in   as- 

Properties  

12,732,568 

sets*  $ 

12,578,580 

Good-Will  

3,391,476 

Preferred     Stock,     par 

Securities  Owned  (book 

$100 

5,495,900 

values)    

143,436 

Capital   Stock  of   Sub- 

Inventory,    Notes,    and 

si  d  i  a  r  y  Companies 

Accounts    Receivable 

Not    Held   by   Aetna 

and  Cash 

9,467.627 

Explosives  Co.,  Inc. . 

380,667 

Special  Deposits  in  Es- 

Funded Debt 

2,228,500 

crow  and  on  Contract 

Current  Liabilities 

5,386,824 

Advances 

3,395,183 

Reserves  and  Advances 

Deferred  Charges 

344,891 

on  Contracts 

5,836,200 

32,445,702 

Surplus 

539,031 

Total $ 

Total ? 

32,445,702 

*630,000  shares  outstanding. 


DISTINCTIVE    CORPORATE    ACCOUNTS 


91 


It  is  advocated  by  some  tliat  when  stock  is  issued  with- 
out par  value  and  there  is  only  one  class  of  stock,  all  out- 
standing, there  is  no  necessity  for  making  a  division  between 
Capital  Stock  and  Surplus  accounts,  since  the  net  profits 
each  time,  either  before  or  after  paying  dividends,  may  be 
credited  to  the  Capital  account  or  to  Net  Worth,  as  the  case 
may  be.  Whatever  the  name,  the  account  selected  under 
this  plan  bears  the  credit  of  capital  paid  in  and  is  credited 
with  the  accumulation  of  profits,  and  debited  with  the  dis- 
tribution of  dividends.  In  that  case,  the  capital  account 
would  change  from  year  to  year,  or  each  time  the  books  are 
closed,  like  the  capital  of  a  partnership.  The  net  amount 
credited  to  Capital,  divided  by  the  total  number  of  shares 
outstanding,  would  give  the  book  value  per  share.  It  is 
preferable,  however,  in  any  case,  to  keep  capital  contribu- 
tions and  surplus  profits  in  separate  accounts.  In  case  the 
company  issued  both  stock  bearing  a  par  value  arid  stock 
without  par  value,  care  must  be  taken  to  show  the  portion 
of  the  profits  belonging  to  each,  though  this  division  may 
or  may  not  be  made  on  the  balance  sheet. 

Impairment  of  capital  by  payment  of  excessive  dividends 
must  be  carefully  guarded  against  in  a  company  where  the 
stock  has  no  par  value.  To  prevent  this,  the  amount  per 
share  paid  in  on  the  stock  should  be  stated  in  the  balance 
sheet  and  also  in  the  ledger  account  itself,  and  profits  be 
kept  entirely  separated  from  the  capital  paid  in  to  the 
company. 

Non-stock  corporations,  as  clubs,  societies,  hospitals, 
and  other  eleemosynary  institutions,  require  a  similar  treat- 
ment as  to  capital  contributed  and  profits  earned.  In  these 
particular  cases,  however,  as  no  stock  is  issued  and  no 
profits  are  distributed,  there  is  usually  no  individual  interest 
to  be  determined.  Everything  contributed  is  for  the  benefit 
of  the  institution  as  such,  and  should  therefore  be  credited 


92 


CORPORATION  RECORDS  AND  ACCOUNTS 


to  Capital  account.  Any  profits  earned  are  likewise  cred- 
ited to  Capital  account  unless  it  is  required  that  profits  be 
set  forth  separately,  while  appropriations  for  any  specific 
purpose  are  charged  to  the  same  account.  There  is  no 
objection,  however,  to  crediting  profits  to  a  separate  ac- 
count, such  as  Surplus  or  Unappropriated  Profits,  and  then 
making  transfers  therefrom  as  needed  either  to  increase  the 
Capital  account  or  to  be  used  in  other  ways.     (See  §  22.) 


§  81.    Organization  Expenses 


Debit: 

With  the  cost  of  all  organiza- 
tion expenses,  such  as  attorney's 
and  accountant's  fees,  incor- 
porating expenses,  promoters' 
services,  underwriting  expenses, 
etc. 


Credit : 

At  the  close  of  each  month  or 
fiscal  period,  as  the  case  may  be 
(depending  on  whether  profits 
are  ascertained  monthly  or  only 
as  often  as  a  physical  inventory 
is  made),  with  the  proper  pro- 
portion of  the  debits  to  this  ac- 
count, based  upon  the  number  of 
years  over  which  the  organiza- 
tion expenses  are  to  be  spread. 


The  balance  of  this  account  is  a  deferred  asset,  and 
represents  the  proportion  of  organization  expenses  which 
are  to  be  charged  off  over  a  given  number  of  years  to  Profit 
and  Loss. 

When  the  expenses  of  organization  amounts  to  more 
than,  say,  $500,  it  is  hardly  just  to  charge  the  entire  amount 
to  Profit  and  Loss  at  any  one  time.  Such  expenses  are  ab- 
solutely essential  to  the  creation  of  the  business,  and  the 
first  year  receives  no  more  benefit  from  the  expenditure 
than  the  fifth  or  sixth.  It  would  therefore  seem  more 
equitable,  so  far  as  the  statistical  feature  of  bookkeeping  is 
concerned,  to  write  such  expenses  off  over  such  a  period  of 
years  as  the  management  may  elect.      Probably  five  years 


DISTINCTIVE    CORPORATE    ACCOUNTS 


93 


would  be  sufficient  for  this  purpose,  in  which  case  one-fifth 
of  the  total  amount  should  be  charged  off  each  year.  (See 
also  §§  154,  166.) 


§  82.    Surplus 


Debit: 

With  the  amount  of  dividends 
declared  (in  case  such  amount 
is  not  charged  to  Profit  and 
Loss). 

With  amounts  reserved  for 
sinking  fund  or  other  similar 
purposes  (in  case  such  amount 
is  not  charged  to  Profit  and 
Loss). 

With  any  adjustment  during 
the  fiscal  period  w^hich  dimin- 
ishes the  profits  of  a  previous 
fiscal  period. 

At  the  close  of  each  fiscal 
period,  with  the  net  loss,  if  any, 
as  shown  by  the  Profit  and  Loss 
account. 


Credit : 

At  the  close  of  each  fiscal 
period,  with  the  net  profit,  if 
any,  as  shown  by  the  Profit  and 
Loss  account. 

With  any  adjustments  made 
during  a  fiscal  period  which 
should  have  been  credited  to 
some  profit  and  loss  account 
within  a  prior  fiscal  period;  or 
which  increase  the  profits  of  a 
prior  fiscal  period. 


The  balance  of  this  account  at  the  close  of  a  fiscal  period 
represents  the  undivided  profits.  It  should  equal  the  dif- 
ference between  the  assets  and  liabilities,  less  the  balance 
of  the  capital  account,  or  accounts,  as  the- case  may  be  (i.e., 
Capital  Stock,  Profit  and  Loss,  etc.).  Surplus  is  an  incre- 
ment of  capital.  When  added  to  the  balance  of  the  capital 
account  (or  accounts),  the  sum  total  should  represent  the 
net  worth  of  the  business.  Surplus  account  may  even  show 
a  debit  balance  as  a  result  of  business  depression,  heavy 
losses,  or  payment  of  excessive  dividends.  In  that  case, 
such  deficit  represents  a  loss  and  the  capital  impairment  of 
the  company. 


94 


CORPORATION  RECORDS  AND  ACCOUNTS 


Surplus  account  should  represent  the  accumulation  of 
undivided  profits.  It  may  include  items  other  than  realized 
profits,  or  it  may  be  diminished  by  writing  down  assets 
below  their  real  value.  When  this  is  done,  the  process  is 
called  "creating  a  secret  reserve."  When  the  credit  side  of 
the  Surplus  account  is  increased  by  figures  which  do  not 
represent  realized  profits,  the  act  is  called  "creating  ficti- 
tious assets,"  or  "watering  the  assets."  It  may  also  be 
credited  with  the  amount  paid  for  shares  of  stock  in  excess 
of  the  par  value — a  practice  that  is  followed  by  many  new 
corporations  such  as  banks  and  insurance  companies. 

When  an  asset  account  is  arbitrarily  increased  by  a  book 
entry,  the  credit  usually  finds  its  way  to  Surplus.  When  a 
business  wishes  to  falsify  the  amount  of  its  surplus,  it 
usually  does  so  by  inflating  some  fixed  asset  account.  Con- 
sequently, a  report  of  an  auditor  is  of  no  value  unless  he 
analyzes  all  debits  and  credits  to  the  Surplus  account  from 
the  beginning  of  business,  and  is  willing  to  certify,  with- 
out qualification,  to  the  correctness  of  the  balance  of  the 
Surplus  account  at  the  time  his  audit  is  made.  (See  also 
Chapter  XXIII.) 


§  83.    Dividends 


Debit: 

With  dividends  paid,  whether 
by  cash  or  by  an  issue  of  stock 
or  otherwise. 


Credit : 

With  the  amount  of  dividends 
declared  by  the  board  of  di- 
rectors, the  corresponding  debit 
being  made  to  Surplus  account 
or  to  Undivided  Profits  account. 


The  balance  of  this  account  represents  dividends  de- 
clared but  not  paid.  It  is  advisable,  when  crediting  this 
account,  to  number  consecutively  the  dividends  declared,  as 
"Dividend  No.  20,"  or  "Dividend  No.  20,  payable  August  i, 


DISTINCTIVE    CORPORATE    ACCOUNTS 


95 


19 1 6."  A  new  account  need  not  be  opened  each  time  a 
dividend  is  declared,  though  this  is  frequently  done.  (See 
also  Chapters  IX,  X.) 


§  84.    Bonds 

Debit: 

Credit: 

With  the  par  value  of  bonds 

With  the  par  value  of  bonds 

retired. 

issued  or  assumed ;  or 

With  the  par  value  of  bonds 

authorized  for  issue  in  case  a 

corresponding  account  is  opened 

for  bonds  not  issued. 

The  balance  of  this  account  represents  the  par  value  of 
bonds  outstanding,  and  is  a  fixed  liability. 

Unissued  bonds  need  not  be  shown  on  the  books,  though 
there  is  no  serious  objection  to  doing  so.  It  is  well,  how- 
ever, to  show  as  a  parenthetical  note  at  the  top  of  the  Bonds 
account,  the  amount  of  the  authorized  issue.  Accounts  are 
opened  for  different  kinds  of  bonds,  and  the  tenor  of  the 
rame  clearly  set  forth  in  the  title  of  these  accounts,  as  "First 
Mortgage  5%  Bonds  of  1940,"  "Collateral  Trust  $% 
Bonds,"  "First  Mortgage  Thirty- Year  Sinking  Fund  Gold 
Bonds,"  etc.     (See  also  Chapter  XVII.) 


§  85.    Bond  Premium 


Debit: 

With  proportionate  amounts 
written  off  monthly  or  yearly  to 
Profit  and  Loss. 


Credit : 

With    premium    received    on 
bonds  sold  above  par. 


This  account  when  it  exists  has  a  credit  balance  and 
shows  the  amount  of  bond  premium  not  yet  written  off.  It 
is  a  profit  to  the  corporation  but  not  one  that  should  be  used 


96 


CORPORATION  RECORDS  AND  ACCOUNTS 


for  the  payment  of  dividends.  The  preferable  way  is  to 
amortize  it  over  a  term  of  five  or  ten  years  by  yearly  or 
monthly  credits  to  Profit  and  Loss.  It  might  even  be 
credited  to  Bond  Discount  account  in  case  such  an  account 
exists  on  the  books,  especially  in  the  case  of  industrial  cor- 
porations not  controlled  by  commission  regulations.  On 
the  balance  sheet  the  bond  premium  is  usually  carried  among 
the  deferred  credit  items  on  the  liability  side  (See  also 
Chapter  XIX.) 


§  86.    Bond  Discount 


'Debit: 

With  the  discount  allowed  to 
bankers  or  underwriters  on  sale 
of  the  company's  bonds. 

With  other  bond  issue  ex- 
penses incurred  at  the  date  of 
issue. 


Credit : 

With  proportionate  amounts 
written  off  either  monthly  or 
yearly  to  Profit  and  Loss  ac- 
count 


This  account  is  a  nominal  deferred  asset  which  is  usually 
spread  over  a  term  of  years,  but,  if  the  profits  will  justify  it, 
may  be  all  charged  off  during  the  first  one  or  two  years.  It 
is  the  practice  to  charge  all  expenses  incident  to  a  bond  issue 
to  some  account  known  as  "Discount  on  Bonds,"  or  "Bond 
Discount  and  Expense,"  and  then  to  amortize  the  amount 
of  this  exf)ense  over  a  term  of  years  or  over  the  life  of 
the  bonds  by  yearly  or  monthly  charges  to  Profit  and 
Loss.  (See  also  Chapter  XIX,  "Bond  Discount  and  Prem- 
ium.") 

Bond  discount  and  underwriting  expenses  are  common 
to  nearly  all  corporate  bond  issues,  and,  while  it  is  per- 
missible to  wipe  such  charge  off  during  the  life  of  the 
bonds,  frequently  a  shorter  geriod  is  taken  as  a  basis  of 
apportionment. 


DISTINCTIVE    CORPORATE    ACCOUNTS 
§  87.    Interest  on  Bonds 


97 


Debit: 

At  the  close  of  each  month,  or 
fiscal  period  if  monthly  profits 
are  not  ascertainable,  with  the 
amount  of  interest  on  bonds  out- 
standing applicable  to  the  month 
or  fiscal  period  just  ended,  as 
the  case  may  be.  The  corre- 
sponding credit  is  to  Accrued 
Interest  on  Bonds. 


The  above  applies  with  equal  force  to  interest  on  out- 
standing mortgages.     (See  also  Chapter  XVIIL) 


Credit: 

Balance  of  this  account  con- 
stitutes a  fixed  revenue  charge, 
and  should  be  transferred  to 
Profit  and  Loss  account  when 
the  books  are  closed. 


§  88.    Accrued  Interest  on  Bonds 


Debit :  Credit : 

With  payments  of  interest  on          At  the  close  of  each  month, 

bonds  outstanding.  or    fiscal    period    if    monthly 

profits  are  not  ascertainable, 
with  the  amount  of  interest  ac- 
crued on  outstanding  bonds  dur- 
ing the  month  or  fiscal  period 
just  ended,  as  the  case  may  be. 
The  corresponding  debit  is  to 
Interest  on  Bonds. 

The  balance  of  this  account  is  a  liability,  and  represents 
interest  accrued  and  not  due.     (See  also  Chapter  XVIIL) 

The  above  applies  with  equal  force  to  interest  accrued 
on  outstanding  mortgages. 

Since  in  most  large  corporations  it  is  the  practice  to 
require  monthly  profit  and  loss  statements  and  balance 
sheets,  accrued  interest  on  bonds,  mortgages,  and  other 
obligations  must  be  set  up  in  the  general  ledger  accounts. 


q8   corporation  records  and  accounts 

§  8g.    Sinking  Fund 


Credit  : 

With  amounts  of  money  dis- 
bursed for  the  purpose  for 
which  the  special  ftmd  was 
created. 


Debit: 

With  amount  of  moneys  trans- 
ferred from  the  general  funds 
of  the  business  to  a  special 
fund  for  the  specific  purpose  of 
meeting  some  fixed  obligation 
at  a  particular  time,  as  a  bond 
issue,  mortgage,  or  other  debt. 

With  the  income  derived  from 
the  investments  of  money  set 
aside  as  a  sinking  fund.  (At 
this  time  credit  Sinking  Fund 
Income  account.) 

The  balance  of  this  account  is  an  asset  and  should  at  any 
time  represent  the  accumulated  value  of  the  sinking  fund. 
The  moneys  thus  taken  are  usually  handed  over  to  a  trustee 
or  board  of  trustees  for  safe-keeping  and  investment,  the 
duties  of  such  trustee  in  respect  of  such  funds  being  set 
forth  in  the  document  creating  the  trust.  (  See  also  Chapter 
XXI.) 

§  go.    Sinking  Fund  Reserve 


Debit: 

With  any  deductions  necessi- 
tated by  loss  or  return  of 
moneys  credited. 

With  transfers  or  appropria- 
tions therefrom  for  other  pur- 
poses or  for  the  benefit  of  some 
other  reserve. 

With  the  balance  when  trans- 
ferred from  this  account  to  Sur- 
plus account  or  to  some  other 
permanent  reserve. 


Credit : 

With  the  amount  appropriated 
out  of  profits  at  designated 
periods  for  the  creation  of  a 
sinking  fund,  the  corresponding 
debit  being  made  to  Profit  and 
Loss  account  or  to  Surplus. 

With  all  income  derived  from 
the  deposit  or  investment  of 
sinking  fund  moneys,  as  inter- 
est or  dividends. 

With  any  profit  on  sales  of 
securities  belonging  to  the  fund. 


DISTINCTIVE    CORPORATE    ACCOUNTS 


99 


This  account  shows  a  credit  balance  and  represents  a 
nominal  liability.  As  the  bonds  for  which  the  reserve  was 
created  mature  and  are  paid  off,  this  account  should  be 
transferred  to  Surplus  or  to  some  such  permanent  account 
as  "Permanent  Reserve"  account,  or  "Surplus  Not  for 
Dividend  Purposes," 

A  sinking"  fund  reserve  is  seldom  created  nowadays, 
since  its  mission  is  taken  care  of  by  other  means  and  by  the 
maintenance  of  an  adequate  surplus  (§  82.)  (See  also 
Chapter  XXI.) 

§  91.    Sinking  Fund  Income 


Debit: 

With  the  transfer  of  income, 
monthly  or  yearly,  to  Profit  and 
Loss  or  to  Sinking  Fund  Re- 
serve account. 


Credit : 

With  any  income  in  the  shape 
of  interest  or  dividends  received 
from  investment  or  deposit  of 
sinking  fund  moneys,  as  re- 
ported by  the  sinking  fund  com- 
mittee or  trustee  in  charge  oi 
the  sinking  fund. 


Income  from  sinking  fund  moneys,  whether  invested  In 
securities  or  on  deposit  in  the  savings  bank,  is  a  profit  to  the 
corporation,  and  is  usually  credited  to  some  representative 
account,  as  Sinking  Fund  Income,  or  Interest  on  Sinking 
Fund.  This  account  is  in  turn  closed  into  Profit  and  Loss, 
or  Reserve  for  Sinking  Fund  in  case  the  latter  account  is 
being  carried.     (See  also  Chapter  XXI.) 


§  92.    Good-will 


Debit: 

With    the   cost    of    good-will 
acquired. 


Credit : 

With   any   portion    of   good- 
I   will  subsequently  written  off. 


The  balance  of  this  account  is  an  intangible  fixed  asset, 


lOO   CORPORATION  RECORDS  AND  ACCOUNTS 

which  ordinarily  remains  unchanged.  Of  late  years,  how- 
ever, there  has  been  a  tendency  to  reduce  the  good-will  from 
time  to  time  by  charges  against  Profit  and  Loss  or  Surplus. 
Good-will  is  a  thing  to  be  acquired,  and  not  created 
arbitrarily  by  a  book  entry.  But  because  of  the  wide- 
spread practice  of  overcapitalizing  which  has  grown  up  in 
corporate  organizations,  the  Good-Will  account  is  almost 
invariably  the  difference  between  the  true  value  of  the  assets 
taken  over  and  the  value  placed  upon  them  by  the  board  of 
directors,  or  acquiesced  in  by  them.  In  other  words,  a 
Good- Will  account  is  commonly  used  in  the  book  accounts 
as  an  offset  to  overcapitalization  of  the  tangible  assets.  It 
is  then  the  difference  between  the  actual  property  value  of 
the  issued  stock  of  a  corporation  and  the  par  value  of  that 
stock  and,  where  this  is  excessive,  may  well  be  written  down 
as  the  value  of  the  tangible  assets  increases.  (See  also 
§§  157-159-) 


§  93.    Investment  in  Stocks  and  Bonds  of  Other  Companies 


>Debit: 

With  the  cost  value  of  stocks 
or  bonds  of  other  corporations. 


Credit : 

With  the  sale  of  stocks  or 
bonds  previously  debited. 


The  account  shows  a  debit  balance  and  is  an  asset.  Such 
investments  are  usually  made  either  for  the  purpose  of  in- 
vesting surplus  funds,  or  with  the  object  of  securing  a  con- 
trolling interest  in  some  competing  concern.  Where  both 
stocks  and  bonds  are  owned,  it  is  advisable  to  open  two 
separate  accounts,  or  even  to  open  an  account  for  each  kind, 
stating  the  name  of  the  compvany  in  connection  therewith, 
as  "Stock  of  American  Bridge  Company,"  "U.  S.  Steel 
Bonds,"  etc.     (See  also  Chapter  VIII.) 


Part  III — Special  Entries  Relating  to  Transactions 
in  Stock  and  Dividends 


CHAPTER    VII 

STOCK  OF  ORIGINAL  ISSUE 

§  94.    General  Conditions 

In  a  partnership  the  investment  consists  of  the  cash  or 
property  contributed  by  the  partners.  In  a  corporation  it 
consists  of  the  proceeds  of  the  stock  sold.  The  interests  of 
partners  are  represented  by  their  capital  accounts,  while  the 
interests  of  stockholders  are  represented  by  their  stock 
holdings,  or  on  the  corporate  books  by  their  respective 
accounts  in  the  stock  ledger.  In  a  partnership  the  profits 
are  usually  credited  to  the  proprietors'  accounts  and  remain 
there  until  drawn  out  according  to  agreement.  The  profits 
of  a  corporation  are  credited  once  a  year  or  oftener  either  to 
Surplus  account  or  to  Undivided  Profits  account,  until,  when 
declared  as  dividends,  they  are  credited  to  Dividend  account, 
and  are  paid  out  as  soon  as  the  dividend  is  due. 

The  opening  entries  on  the  books  of  a  corporation  are 
determined  by  the  conditions  under  which  the  stock  is  sold, 
and  it  is  important  that  such  entries  should  be  complete  and 
clear.  They  sometimes  fail  in  this  and  are  obscure  because 
of  insufficient  data  in  the  journal  entries.  This  may  be  due 
to  carelessness  or  ignorance,  or  occasionally  to  the  desire 
of  the  incorporators  to  withhold  certain  facts  regarding  the 

lOI 


I02  SPECIAL    ENTRIES 

company's  organization  that  might  be  used  later  to  their 
disadvantage.  As  to  this,  it  can  only  be  repeated  that  all 
entries  should  tell  the  truth  clearly  and  unmistakably;  and 
it  may  be  added  that,  no  matter  how  cunningly  such  entries 
are  devised,  a  competent  accountant  can  always  discover 
their  true  meaning. 

Entries  covering  the  various  conditions  of  stock  issues, 
as  given  in  the  present  and  the  succeeding  chapter,  include 
the  following: 

1.  Entries  for  original  issues  of  stock  sold  under  differ- 

ent conditions. 

2.  Entries  relating  to  stock  donated  to  the  treasury. 

3.  Entries  where  an  original  issue  of  stock  or  treasury 

stock   is   given  in   direct   payment   of  corporate 
obligations. 

4.  Entries  relating  to  the  purchase  and  sale  by  the  cor- 

poration of  its  own  stock  (not  an  original  issue), 
and  of  other  stocks. 

The  entries  given  are  intended  merely  to  show  the  debits 
and  credits  directly  resulting  from  the  transactions  con- 
sidered. In  practice  all  cash  entries  are,  of  course,  recorded 
in  the  cash  book  and  are  thence  posted  to  the  proper  ledger 
accounts;  but  throughout  the  present  volume,  for  the  sake 
of  clearness  the  entire  transaction  is,  in  each  case,  expressed 
in  the  form  of  a  journal  entry  regardless  of  whether  it 
belongs  in  the  cash  book  or  journal,  or  should  be  divided 
between  the  two  books.  In  this  connection  reference  to  the 
rules  laid  down  in  the  preceding  chapter  should  be  made. 

Many  transactions  encountered  in  opening  corporate 
books  admit  of  different  treatment ;  and  accordingly,  in  the 
following  chapters  it  will  be  found  that  transactions  identical 
in  nature  have  been  variously  handled  for  purposes  of 
exemplifying  the  different  methods. 


STOCK    OF    ORIGINAL    ISSUE  103 

§  95.    Pro  Forma  Statement 

The  Davison  Mercantile  Company  has  been  organized 
with  a  capital  stock  of  $200,000,  divided  into  2,000  shares 
of  $100  each.  1,500  shares  were  subscribed  for  at  par,* 
as  follows : 

A.  W.  Davison ,. .  800  shares 

George  H.  Brandon. 300       " 

R.  S.  Cooke 200       " 

James  Robinson 200       " 

All  subscriptions  have  been  paid  in  cash,  excepting  that 
of  Davison,  who  turned  over  merchandise  on  his  subscrip- 
tion to  the  value  of  $50,000  and  paid  the  balance,  $30,000, 
in  cash.  The  total  cash  paid  into  the  treasury  of  the  com- 
pany is  therefore  $100,000. 

Two  plans  of  opening  the  books  of  the  Davison  Mer- 
cantile Company  are  shown  on  the  following  pages.  It  is 
to  be  noticed  that,  in  opening  the  journal  of  a  new  corpora- 
tion under  any  plan,  the  first  entry  should  be  a  reasonably 
complete  statement  of  the  conditions  under  which  the  cor- 
poration is  organized,  somewhat  similar  to  that  given  in 
the  two  preceding  paragraphs.  This  is  desirable  in  order 
to  bring  together  into  one  clear,  concise  statement,  all  the 
details  of  the  incorporation  required  by  the  accountant,  and 
to  relieve  the  opening  entries  of  the  detail  otherwise  neces- 
sary. Without  this  pro  forma  entry  as  a  basis,  the  explana- 
tion of  the  following  journal  entries  would  be  too  meager. 

§  96.    Opening  Entries— Stock  Full-Paid  (Plan  i) 

Cash $100,000 

Merchandise 50,000 

To  Capital  Stock $150,000 

Cash  and  property  received  by  the  Company 

•See  subscription  list  (§  ss)- 


I04  SPECIAL    ENTRIES 

in  full  payment  of  subscriptions  to  its 
capital  stock,  as  follows: 

A.  W.  Davison 800  shares 

George  H.  Brandon 300      " 

R.  S.  Cooke 200      " 

James   Robinson 200      " 

Merchandise  to  amount  of  $50,000  was 
turned  in  by  A.  W.  Davison  as  part  pay- 
ment of  his  subscription,  the  balance  being 
paid  in  cash. 


This  opening  entry  is  the  simplest  possible.  Incoming 
cash  and  merchandise  receive  their  proper  debits,  ^nd  capital 
stock  is  credited  with  the  amount  subscribed  and  paid  for. 
In  this  case  the  cash  item  is  entered  in  both  the  journal  and 
the  cash  book,  as  is  not  uncommon  in  opening"  entries.  To 
meet  this  condition,  the  general  ledger  item  in  the  cash 
book  entry  is  checked  to  indicate  that  it  is  not  to  be  posted, 
and  the  cash  item  in  the  journal  entry  is  likewise  checked 
and  not  posted. 

§  97.    Opening  Entries— Stock  Full-Paid  (Plan  2) 

As  capital  stock  is  credited  with  the  amount  of  stock 
sold,  the  amount  unissued  may  be  readily  determined  under 
the  entries  of  Plan  i,  by  subtracting  the  amount  sold  from 
the  total  capital  stock.  If  it  is  thought  preferable  to  have 
an  account  which  shows  the  amount  of  stock  unissued, 
Capital  Stock  is  credited  with  the  entire  amount  authorized, 
and  the  part  not  issued  is  debited  to  a  separate  account  called 
"Unsubscribed"  or  "Unissued"  Stock.  Whether  this  is 
worth  while  is  for  the  accountant  to  determine.  Under  this 
plan  the  opening  entries  of  the  Davison  Mercantile  Company 
would  be  as  given  below.  Where  there  is  more  than  one 
kind  of  stock  issued,  it  is  necessary,  of  course,  to  open  an 
account  for  each. 


STOCK    OF    ORIGINAL    ISSUE 


105 


First  Entry 

Subscribed  Stock $150,000 

Unissued  Stock 50,000 

To  Capital  Stock $200,000 

The   Davison   Mercantile   Company   is   or- 
ganized with  a  capital  stock  of  $200,000, 

divided  into  2,000  shares  of  $100  each. 

1,500  shares  were  subscribed  for  at  par 

by  the  incorporators  as  follows : 

A.  W.  Davison 800  shares 

George  H.  Brandon 300      " 

R.  S.  Cooke 200      " 

James  Robinson 200      " 

Unissued  Stock  is  debited,  as  shown,  with  the  entire 
balance  of  the  unsubscribed  stock,  which  remains  there  until 
sold  or  otherwise  disposed  of. 

Frequently  the  entire  authorized  capital  stock  is  first 
debited  to  Unissued  Stock  account  and  credited  to  Capital 
Stock  Authorized  account,  thereby  establishing  an  opening 
entry  on  the  books.  In  that  case,  the  above  entry  would  be 
modified  by  a  debit  to  Subscribed  Stock,  or  Subscriptions, 
and  a  credit  to  Unissued  Stock,  for  $150,000;  and  when 
this  amount  is  entirely  paid,  another  entry  would  be  made 
transferring  the  $150,000  from  Capital  Stock  Authorized 
to  Capital  Stock.  This  plan  is  in  common  use  and  is  both 
simple  and  adequate  for  opening  corporate  entries. 

Second  Entry 

Cash $100,000 

To  Subscribed  Stock $100,000 

Payment  of  incorporators'  subscriptions  to 
stock  as  follows : 

A.  W.  Davison $30,000 

George  H.  Brandon 30,000 

R.  S.  Cooke 20,000 

James  Robinson 20,000 


Io6  SPECIAL    ENTRIES 

Third  Entry 

Merchandise $50,000 

To  Subscribed  Stock $50,000 

Payment  of  balance  of  Davison's  subscrip- 
tion to  stock,  paid  in  merchandise  as  per 
agreement. 

As  will  be  noted,  "Subscribed  Stock"  is  debited  with  the 
full  amount  subscribed ;  and  this  having  been  paid,  is  credited 
with  the  same  amount;  the  account  then  balancing-  and 
thus  showing  that  all  stock  subscribed  has  been  paid.  Where 
subscriptions  are  not  paid  at  once,  or  where  they  are  paid 
in  instalments,  subscribers'  accounts  are  sometimes  opened 
in  the  general  ledger;  but  in  practice  it  is  better  to  open 
individual  accounts  in  a  subsidiary  ledger,  letting  "Sub- 
scribed Stock"  account  in  the  general  ledger  represent  all 
these  as  a  controlling  account.  When  the  number  of  sub- 
scribers is  large,  it  is  sometimes  advisable  to  record  them 
collectively  in  the  ledger  under  "Subscriptions"  account,  as 
explained  in  §  74. 

§  98.    Stock  Sold  on  Instalments  (Plan  i) 

In  accordance  with  the  data  furnished  by  the  subscrip- 
tion list,*  the  Lancaster  Cement  Company  was  organized 
July  I,  1916,  with  a  capital  stock  of  $1,000,000,  one-half  of 
which  was  subscribed  for  as  follows : 

Ronald  Logan 1,000  shares 

Samuel  Bennett 1,000       " 

A.  W.  Thompson 1,000       " 

J.H.Connor , 1,000       " 

Oliver  Ferguson 1,000       " 

The  terms  of  subscription  are  10%  down,  30%  on  July 
21,  and  the  remainder  in  two  instalments  as  shown  by  the 
agreement. 

•Sec  g  51- 


STOCK    OF    ORIGINAL    ISSUE 


107 


The  instalment  book*  shows  the  method  of  recording 
calls  for  instalments.  The  first  call  was  made  by  the  trustee 
July  I ;  the  second  presumably  upon  final  incorporation. 

As  one-half  of  the  stock  was  subscribed  at  the  time  of 
organization,  this  amount  may  at  once  be  entered  upon  the 
books  as  an  asset,  since  it  represents  definite  obligations  due 
the  company.  Occasionally  the  Subscription  account  is 
omitted  and  no  formal  entry  of  the  subscriptions  made  in 
the  ledger  beyond  a  credit  to  Capital  Stock  as  each  instal- 
ment is  paid.  In  that  case  the  entries  given  below  would 
be  omitted  and  only  cash  entries  made,  Cash  being  debited 
and  Capital  Stock  credited.  Sometimes  the  amount  sub- 
scribed is  credited  to  Capital  Stock  Subscribed  account  and 
when  paid  transferred  to  Capital  Stock  account. 

First  Entry  j^,y  ^^  ^^^^ 

Subscriptions $500,000 

Unissued  Stock 500,000 

To  Capital  Stock $i,ooo,ooc 

The  Lancaster  Cement  Company  was  or- 
ganized on  this  date  with  capital  stock 

of  $1,000,000,  divided  into  10,000  shares 

of  the  par  value  of  $100  each,  one-half 

of  which  has  been  subscribed  as  per  the 

following  list.     Terms  of  subscription 

are  10%  on  July  i,  1916,  30%  on  July 

21,   and   the   remainder   in   two   instal- 
ments as  per  agreement. 

Ronald   Logan 1,000  shares 

Samuel   Bennett 1,000      " 

A.  W.  Thompson 1,000      " 

J.  H.  Connor 1,000      " 

Oliver  Ferguson 1,000      " 

5,000      " 

Unissued , .  5,000      " 

Total 10,000      ** 

"See  §  58. 


Io8  SPECIAL    ENTRIES 

The  amount  subscribed  being-  now  entered  upon  the 
books,  the  next  step  is  to  make  entries  for  the  instahnents 
as  they  come  due,  the  Instalment  account  being  debited  and 
Subscriptions  credited.  The  accounts  of  subscribers  must 
be  shown  either  in  the  subscription  ledger,  the  instalment 
register,  or  the  general  ledger.  Sometimes  they  are  placed 
in  the  back  of  the  general  ledger,  but  if  they  are  numerous 
it  is  advisable  to  place  them  in  a  separate  book.  Of  course, 
the  total  of  the  balances  of  these  accounts  must  agree  with 
the  balance  of  the  Subscriptions  account  in  the  general 
ledger,  which  is  the  controlling  account.  If  the  number 
of  subscribers  is  large,  an  instalment  sheet  is  made  out,  as 
shown  in  §  58. 

Second  Entry  j^jy  j^  j^^g 

Instalment  No.  i $50,000 

To  Subscriptions $50,000 

First  instalment  for  10%  of  $500,000  subscrip- 
tions, as  per  subscription  list  and  instalment 
book. 

As  the  payments  are  made  t<hey  are  credited  to  the  in- 
dividual accounts  and  also  to  Subscriptions  account  in  the 
general  ledger,  or  to  the  Instalment  account  when  that  is 
used.  The  latter  plan  is  shown  below,  though  instead  of 
opening  an  account  for  each  instalment,  an  account  for 
"Subscribers"  might  be  opened  each  time  an  instalment  is 
due,  as  shown  in  §  74. 

The  following  entries  assume  that  all  the  subscribers 
pay  the  instalment.  If  this  is  not  the  case,  the  actual  amount 
received  will  be  entered,  leaving  a  balance  due  in  Instalment 
No.  I. 

Third  Entry  j^jy  ^^  j^^g 

Cash $50,000 

To  Instalment  No.  i $50,000 

For  payment  of  first  instalment  of  10%. 


STOCK    OF    ORIGINAL    ISSUE 


109 


Fourth  Entry 

July  21,  1916 

Instalment  No.  2 $150,000 

To  Subscriptions $150,000 

For  second  call,  30%  on  total  subscriptions 
of  $500,000. 


Fifth  Entry 

July  21,  1916 

Cash $150,000 

To  Instalment  No.  2 $150,000 

For  payment  of  second  instalment  of  30%. 

§  99.  Stock  Sold  on  Instalments  (Plan  i) — Ledger  Accounts 

The  general  ledger  accounts  resulting  from  the  fore- 
going entries  are  as  follows : 

Capital  Stock 


1916 

July  I     Authorized..  $1,000,000.00 

Subscriptions 


1916 

July  I     Capital  Stock..  $500,000.00 


1916 

July  I    Instalment  No.  i  $50,000.00 
"   21   Instalment  No.  2  150,000.00 


Unissued  Stock 


1916 

July  I     Capital  Stock. .  $500,000.00 

Instalment  No.  i — 10% 


1916 

July  I     Subscriptions..    $50,000.00 


1916 

July  I     Cash $50,000.00 

(If  not  all  paid 

a   balance    will 

result.) 


no  SPECIAL    ENTRIES 

Instalment  No.  2 — 30% 


1916 

July  21     Subscriptions    $150,000.00 


1916 

July  21     Cash  $150,000.00 

(If  not  all  paid 

a    balance    will 

result.) 


Cash 


1916 

July  I   Instalment  No.  i  $50,000.00 
"   21   Instalment  No.  2  150,000.00 

If  the  names  are  not  too  numerous  or  the  instalments 
too  frequent,  each  instalment  account  might  include  on  the 
debit  side  the  names  of  subscribers  and  the  amount  due  from 
each ;  though  this  is  not  necessary,  as  all  this  information  is 
clearly  set  forth  on  the  instalment  sheet  or  book. 

§  100.    Stock  Sold  on  Instalments  (Plan  2) 

In  this  case  Capital  Stock  account  exhibits  only  the 
capital  actually  contributed,  being  increased  for  each  instal- 
ment paid  in,  and  also  for  any  subsequent  sales  of  stock  of 
original  issue.  The  entry  of  unissued  stock  is  manifestly 
out  of  the  question  under  this  plan  of  entry,  since  it  is 
neither  an  asset  nor  a  liability. 

First  Entry — First  Instalment 

July  I,  1916 

Subscribers $50,000 

To  Capital  Stock $50,000 

The  Lancaster  Cement  Company  was  or- 
ganized on  this  date  with  capital  stock 
of  $1,000,000,  divided  into  10,000  shares 
of  the  par  value  of  $100  each,  one-half 
of  which  has  been  subscribed  as  per  the 
list  given  below.  Terms  of  subscription 
are  10%  on  July  i,  1916,  30%  on  July 


STOCK    OF    ORIGINAL    ISSUE  HI 

21,  and  the  remainder  in  two  instalments 
as  per  agreement.  First  instalment,  io% 
on  $500,000,  now  due. 

(List  of  subscribers) 

Second  Entry 

July  I,  1916 

Cash $50,000 

To  Subscribers $50,000 

For  payment  of  first  instalment. 

Third  Entry — Second  Instalment 

July  21,  1916 

Subscribers $150,000 

To  Capital  Stock $150,000 

For  second  call,  30%  .of  $500,000. 

Fourth  Entry 

July  21,  1916 

Cash $150,000 

To  Subscribers $150,000 

Payment  of  second  instalment  of  30%. 

If  thought  advisable,  the  journal  entries  might  be 
omitted  and,  the  Subscribers'  account  being  ehminated,  only 
cash  book  entries  be  made,  crediting  Capital  Stock ;  but  this 
does  not  permit  the  full  explanations  which  can  be  so  con- 
veniently placed  in  the  journal. 

§101.    Sale  of  Stock  After  Organization 

The  statutes  of  the  various  states  usually  require  that 
when  a  company  is  organized  some  portion  of  its  stock 
shall  be  issued,  or  at  least  subscribed  for,  before  active 
operations  are  begun.  Some  of  the  capital  stock  must,  of 
course,  be  sold  before  the  company  can  exist  as  an  active 
business  organization;  but  beyond  these  statutory  require- 
ments, the  whole  matter  is  one  for  the  corporation  itself  to 


112  SPECIAL    ENTRIES 

decide,  and  the  capital  stock  may  be  all  issued  at  the  time 
of  organization  or  part  be  held  for  future  use  in  case  the 
immediate  needs  of  the  company  are  provided  for.  This 
unsubscribed  or  unissued  stock  is  sometimes  (though  in- 
appropriately) called  "treasury  stock"  (§  27). 

Assuming  that  on  August  i,  19 16,  $100,000  of  the  im- 
issued  stock  of  the  Lancaster  Cement  Company  has  been 
sold  at  par  to  Frank  K.  Brennan,  one-half  for  cash  and  one- 
half  in  30  days,  the  following  entries  would  be  required : 

August  I,  1916 

Subscriptions  (or  Frank  K.  Brennan) $100,000 

To  Unissued  Stock $100,000 

The  Lancaster  Cement  Company  has  this 
day  sold  to  Frank  K.  Brennan  $100,000 
of  its  unissued  stock,  one-half  payable 
in  cash  and  the  balance  in  30  days. 

August  I,  1916 

Cash $50,000 

To  Subscriptions  (or  Frank  K.  Brennan)  $50,000 

First  payment  of  50%  on  Brennan's  stock 
idbscription. 

August  31,  1916 

Cash $50,000 

To  Subscriptions  (or  Frank  K.  Brennan)  $50,000 

Final  payment  of  50%  on  Brennan's  sub- 
scription to  $100,000  of  stock. 

It  is  apparent  that  th«  method  of  recording  entries  in 
this  case  will  be  governed  by  the  original  plan  of  opening 
entries,  as  the  various  entries  should,  of  course,  harmonize. 

§  102.    Stock  Sold  Below  Par 

As  already  stated,  when  stock  on  its  original  issue  is 
sold  below  par,  it  may  involve  the  purchaser  in  liability  for 


STOCK    OF    ORIGINAL    ISSUE 


113 


the  unpaid  balance.  (See  §  26.)  Occasionally,  however, 
stock  is  sold  on  original  issue  at  less  than  par  regardless  of 
this  liability.  This  may  be  all  right  if  not  prohibited  by  the 
state  law;  but  it  is  obvious  that  the  liability  for  the  unpaid 
balance  still  attaches  to  such  stock  so  long  as  it  is  in  the 
hands  of  the  original  purchasers  or  those  who  purchase 
from  them  with  knowledge  of  the  conditions. 

To  illustrate  the  entries  in  such  case;  assume  that  on 
August  15,  1916,  $100,000  of  the  unissued  stock  of  the 
Lancaster  Cement  Company  is  sold  to  Henry  Jones  for 
$80,000,  payable  $40,000  on  date  of  purchase,  and  the 
balance  in  one  month.    The  entries  are  then  as  follows : 

August  15,  1916 

Henry  Jones $80,000 

Discount  on  Stock 20,000 

To  Unissued  Stock $100,000 

For  sale  of  1,000  shares  of  unissued  stock 
to  Henry  Jones  at  $80  per  share,  payable 
$40,000  down  and  the  balance  in  one 
month. 

August  15,  1916 

Cash $40,000 

To  Henry  Jones $40,000 

First  payment  on  subscription  to  .1,000 
shares  of  stock. 

September  15,  1916 

Cash $40,000 

To  Henry  Jones $40,000 

Balance  of  payment  on  subscription  to  1,000 
shares  of  stock. 

The  Stock  Discount  account  now  remains  open  upon  the 
books  and  should  either  be  closed  into  Profit  and  Loss 
during  the  year,  or  spread  over  a  term  of  years;  or  the 


114 


SPECIAL    ENTRIES 


directors  may  appropriate  enough  of  the  surplus  profits  in 
the  form  of  a  dividend  to  wipe  it  off  entirely.  It  is  prudent 
in  any  case  to  get  rid  of  it  as  soon  as  possible  so  as  to 
remove  from  the  records  an  undesirable  item.  In  the  fol- 
lowing entry  it  is  closed  into  Profit  and  Loss. 

Profit  and  Loss $20,000 

To  Discount  on  Stock $20,000 

To  close  Stock  Discount  account  into  Profit 
and  Loss — entry  made  by  order  of  the 
board  of  directors. 

The  above  entry  will  suffice,  perhaps,  in  case  the  profits 
are  ample  to  take  care  of  it;  but,  if  by  this  disposition  a 
deficit  is  created  in  the  Profit  and  Loss  account,  nothing  has 
been  gained  by  the  transfer. 

§  103.    Stock  Sold  Above  Par 

It  is  but  seldom  that  stock  in  a  newly  organized  com- 
pany sells  for  more  than  its  face  value.  Occasionally,  how- 
ever, where  the  new  company  takes  over  valuable  property, 
or  its  organizers  are  men  known  to  be  successful  and  its 
purpose  is  attractive,  subscriptions  are  taken  at  more  than 
par. 

After  a  company  has  been  organized  and  has  achieved 
success,  its  stock,  if  offered  for  sale,  is  usually  for  the  pur- 
pose of  raising  money  to  extend  the  business,  purchase  new 
properties,  or  do  something  else  distinctly  advantageous  to 
the  corporation.  In  such  cases  the  stock  is  frequently  worth 
more  than  par,  and  the  right  of  purchase  is  usually  offered 
first  to  the  stockholders,  who  are  privileged  to  buy  all  or 
part  of  the  issue  at  par  or  at  a  given  figure  above  par.  Such 
privileges  have  a  distinct  value,  and  it  is  not  unusual  for 
rights  of  this  kind  in  the  larger  corporations  to  be  traded  in 
freely. 

When  a  corporation  sells  its  stock  at  a  premium,  the 


STOCK    OF    ORIGINAL    ISSUE  Hg 

proceeds  in  excess  of  the  par  value  are  credited  either  to 
Premium  account  or  to  Surplus  account,  and  represent 
profits.  Speaking  generally,  however,  it  would  be  of  doubt- 
ful wisdom  for  the  directors  to  distribute  such  premiums  in 
the  form  of  dividends,  even  though  they  may  have  the 
technical  authority  to  do  so. 

To  illustrate  the  accounting  treatment  of  premiums, 
assume  that  $100,000  face  value  of  the  unsubscribed  stock  of 
the  Lancaster  Cement  Company  has  been  sold  November  i , 
19 16,  to  George  Bowers  for  $120,000,  payable  $50,000  at 
date  of  purchase  and  the  balance  in  one  month.  The  entries 
for  the  transaction  would  be  as  follows : 

November  i,  1916 

George  Bowers  (or  Subscriptions) $120,000 

To  Unissued  Stock $100,000 

"    Stock  Premium 20,000 

The  Lancaster  Cement  Company  has  this 
day  sold  to  George  Bowers  $roo,ooo  of  its 
unissued  stock  for  $120,000;  $50,000  is 
payable  on  the  day  of  purchase,  and  the 
balance  in  30  days. 

November  i,  1916 

Cash $50,000 

To  George  Bowers $50,000 

First  payment  on  account  of  subscription 
to  stock. 

December  i,  1916 

Cash    $70,000 

To  George  Bowers $70,000 

Balance  due  on  account  of  subscription  to 
stock. 

The  premium  may  stand  in  the  Stock  Premium  account, 
or  be  transferred  to  Surplus  or  to  a  permanent  reserve 
account ;  or  it  might  be  reserved  for  the  extinguishment  of 
some  doubtful  or  wasting  asset,  as  good-will,  plant,  or  some 


Il6  SPECIAL    ENTRIES 

machine  or  patent  right.  In  case  it  were  transferred,  Stock 
Premium  account  would,  of  course,  be  debited  and  the 
account  to  which  it  is  transferred  be  credited. 

§  104.    Stock  Issued  at  a  Premium  to  Create  a  Surplus 

In  the- previous  illustration  the  stock  of  an  established 
company  was  sold  at  a  premium.  It  is  not  unusual  for  a 
corporation  to  sell  its  stock  above  par  at  the  time  of  incor- 
poration, for  the  purpose  of  creating  a  surplus — a  practice 
which  is  usually  followed  by  insurance  companies,  banks, 
trust  companies,  and  other  financial  institutions.  A  com- 
pany with  a  substantial  surplus  is  more  likely  to  possess  the 
confidence  of  the  public  than  one  that  has  none;  and  by 
selling  stock  at  a  premium  a  more  or  less  substantial  surplus 
or  margin  is  provided  at  the  outset,  which  may  be  drawn 
upon  to  meet  organization  expenses,  and  carry  the  company 
and  give  it  solidity  until  it  becomes  firmly  established. 

When  stock  is  thus  sold  at  a  premium,  the  entries  are 
the  same  as  in  any  other  sale  above  par.  For  example,  if  a 
share  of  stock  is  sold  for  $150,  the  par  value,  $100,  might  be 
credited  to  Unissued  Stock  or  Capital  Stock,  and  the  $50 
to  Premium  or  Surplus. 

There  are  material  advantages  in  this  plan  of  selling 
stock,  especially  in  the  case  of  a  national  bank,  where  a 
double  liability  is  attached  by  statute  to  every  share  of  its 
stock.  If  the  stock  is  sold  at  a  premium  sufficient  to  meet 
the  statutory  liability,  not  only  is  this  liability  provided 
against,  but  the  bank  is  given  a  substantial  and  desirable 
addition  to  its  working  capital. 

In  any  such  case  the  premium  is  credited  to  Surplus. 
Thus,  assume  that  the  Second  National  Bank  of  Shawtnut 
has  been  incorporated  with  a  capital  stock  of  $250,000,  all 
of  which  has  been  sold  at  a  premium  of  50%.  The  book 
entry  would  appear  as  follows: 


STOCK    OF    ORIGINAL    ISSUE  ^y 

Cash $375,000 

To  Capital  Stock $250,000 

"    Surplus   125,000 

The  Second  National  Bank  of  Shawmut  in- 
corporated with  capital  stock  of  $250,000, 
has  on  this  date  sold  the  same  at  a 
premium  of  50%. 

This  contributed  surplus  remains  on  the  books  as  a 
credit  to  Surplus  account. 

§  105.    Payment  of  Salaries  in  Stock 

Not  infrequently  the  salaries  of  managers  and  officers 
of  corporations  are  paid  wholly  or  partly  in  stock.  The 
procedure  is  not  improper  under  suitable  conditions,  and  the 
entries  are  simple.  It  is  in  effect  a  payment  of  salaries  in 
cash  which  is  subsequently  returned  as  payment  for  stock. 
Such  stock  salaries  might  be  paid  monthly  if  so  agreed,  but 
even  when  based  on  monthly  instalments,  they  are  usually 
allowed  to  accumulate  till  the  end  of  the  year  or  longer, 
before  an  issue  of  stock  is  made.  In  any  case,  a  debit  will 
be  made  to  the  proper  salary  account  or  else  to  expense 
account,  and  a  credit  of  the  full  face  value  of  stock  issued 
made  to  Capital  Stock,  Unissued  Stock,  or  Treasury  Stock, 
according  to  the  conditions  and  the  method  of  entry.  If 
the  stock  is  not  taken  at  its  par  value,  any  excess  over  par 
is  credited  to  Surplus,  or,  if  taken  below  par,  the  difference 
between  this  price  and  par  is  debited  to  Surplus. 

§  106.    Payment  of  Commissions  in  Stock 

Commissions  paid  in  stock  are  of  common  occurrence 
in  the  promotion  or  organization  of  a  company,  and  they 
create  no  unusual  bookkeeping  entries.  If  paid  by  issue  of 
original  stock.  Commission  account  (or  such  other  expense 
account  as  commissions  may  be  charged  to)  is  debited,  and 
Capital  Stock  or  Unissued  Stock  account  is  credited;  pay- 


Il8  SPECIAL    ENTRIES 

ments  from  treasury  stock  are  similarly  debited  and  are 
credited  to  "Treasury  Stock."  Indeed,  there  is  no  objection 
to  the  liquidation  of  any  debts  by  stock,  so  long  as  the 
capital  is  not  impaired  by  so  doing,  i.e.,  so  long  as  a  fair 
equivalent  is  received  for  the  issued  stock.  An  existing 
mortgage  or  even  a  loan  or  current  debt  might  be  cancelled 
by  means  of  a  stock  issue,  provided  the  creditor  were  willing 
to  accept  it  as  a  substitute  for  cash.  Dividends  are  fre- 
quently paid  in  stock,  such  dividends  being  known  as  "stock 
dividends"  (§  131). 


CHAPTER   VIII 

TREASURY    STOCK    AND    STOCK    OF 
OTHER    COMPANIES 

Transactions  in  Treasury  Stock 

§  107.    Donated  Stock 

In  speculative  companies,  donations  of  stock  to  the 
treasury  (see  §  27)  are  customary,  and  give  rise  to  some 
of  the  most  unsatisfactory  entries  of  corporate  bookkeeping. 

Any  donation  to  a  commercial  undertaking  is  anomalous, 
but  v^hen  it  takes  the  form  of  stock  just  issued  (and  hence 
of  unknown  value)  by  the  very  corporation  to  which  it 
is  donated,  the  transaction  is  entirely  outside  the  realm  of 
ordinary  business  and  its  proper  entry  is  difficult.  The 
object  of  such  a  donation  of  stock  has  already  been  stated 
(§  27).  The  newly  organized  corporation  requires  stock 
which  can  be  sold  below  par  without  carrying  with  it  a 
liability.  Treasury  stock  supplies  this  need,  and  so  long  as 
the  laws  relating  to  full-paid  stock  exist  in  their  present 
form,  so  long  will  transactions  in  donated  stock  continue.* 

When  a  corporation  reacquires  its  own  stock,  whether 
by  donation  or  purchase,  this  stock  becomes,  from  the 
accounting  standpoint,  an  asset,  and  is  debited  to  "Treasury 
Stock"  at  the  price  paid  if  the  stock  is  purchased,  or  at  its 
estimated  value  if  it  is  donated.  The  corresponding  credit 
in  the  case  of  stock  purchased  for  cash  is,  of  course,  to 
Cash  account,  but  in  the  case  of  donated  stock  the  account 


•Under  the  New  York  law  permitting  corporations  to  issue  stock  without  par 
value,  stock  so  issued  may  be  sold  at  any  desired  price   without  liability. 

119 


T20  SPECIAL    ENTRIES 

to  be  credited  will  vary  according  to  the  method  of  record 
adopted, 

§  io8.    Donated  Stock — First  Method  of  Entry 

Under  this  method,  if  a  corporation  is  organized  with 
a  capital  stock  of  $75,000,  all  of  which  is  issued  in  payment 
for  property,  and  stock  of  the  face  value  of  $10,000  is 
returned  to  the  company  to  be  sold  to  secure  operating 
capital,  the  entries,  assuming  the  stock  to  be  salable  at  par, 
will  be  as  follows : 

Treasury  Stock $10,000 

To  Donation  Account  (or  Working  Capital 

Donated ) $10,000 

Stock  donation  of  100  shares  to  be  sold  to  pro- 
vide working  capital. 

When  the  stock  is  sold,  the  following  entry  is  required : 

Cash $10,000 

To  Treasury  Stock $10,000 

For  100  shares  of  treasury  stock  sold  at  $100 
per  share. 

The  "Donation"  account  is  then  closed  into  Surplus 
account  as  follows : 

Donation  Account $10,000 

To  Surplus $10,000 

Closing  Donation  account  into  Surplus. 

This  gives  the  corporation  an  apparent  profit  of  $10,000. 
Whether  such  a  surplus  is  a  real  profit  applicable  to  divi- 
dends must  be  decided,  according  to  conditions,  by  the 
directors  of  the  particular  corporation.  As  a  matter  of  fact, 
such  a  surplus  is  practically  taken  out  of  capital  and  its 
use  for  dividends  is  of  doubtful  propriety.  If  the  stock  was 
donated  to  provide  working  capital,  the  use  of  its  proceeds 
for  dividends  would  be  manifestly  improper. 


TREASURY     STOCK  12 1 

Donated  stock  can  rarely  be  sold  at  par,  and  it  is  entered 
at  the  time  it  is  received,  at  such  price  as  the  corporate 
authorities  think  it  will  produce.  Thus,  in  the  case  in- 
stanced, if  instead  of  $ioo  per  share  the  stock  were  expected 
to  bring  but  $50  per  share,  it  would  be  entered  upon  the 
corporate  books  as  follows : 

Treasury  Stock $5,000 

To  Donation  Account $5,ooo 

For  100  shares  of  stock  donated  to  treasury 
for  the  purpose  of  securing  working  capital; 
estimated  value,  $50  per  share. 

When  the  stock  is  sold  at  the  estimated  price,  the  other 
entries  are  similar  to  those  given.  Cash  being  debited.  Treas- 
ury Stock  credited  with  the  amount  received,  and  Donation 
account  closed  into  Surplus.  If,  however,  the  stock  when 
sold  produced  a  larger  price  than  was  expected,  say  $60 
per  share,  the  cash  entry  would  be  as  follows : 

Cash $6,000 

To  Treasury  Stock $S,ooo 

"    Donation  Account 1,000 

For  100  shares  of  stock  donated  to  treasury  and 
sold  at  $60  per  share. 

This  gives  a  total  credit  in  Donatiori^account  of  $6,000, 
which  is  the  amount  actually  realized  on  the  donated  stock. 
Donation  account  is  then  closed  into  Surplus  by  a  journal 
entry. 

If,  on  the  other  hand,  the  treasury  stock  sold  at  less 
than  the  estimated  value,  say,  for  instance,  $40  per  share, 
the  cash  entry  would  be  as  follows : 

Cash $4,000 

To  Treasury  Stock $4,000 

For  100  shares  donated  to  treasury  and  sold  at 
$40  per  share. 


122  SPECIAL    ENTRIES 

The  difference  between  the  estimated  value  and  sale 
price  of  the  stock  is  then  debited  to  Donation  account  as 
follows : 

Donation  Account $i,ooo 

To  Treasury  Stock $i,ooo 

For  100  shares  of  stock  donated  to  treasury  and 
entered  at  $50  per  share,  but  sold  at  $40  per 
share. 

This  shows  a  credit  balance  in  Donation  account  of 
$4,000,  which  is  the  real  value  of  the  stock  donated,  and  the 
account  is  then  closed  into  Surplus.  The  same  end  might, 
of  course,  be  attained  by  the  single  entry  which  follows: 

Donation  Account $5,ooo 

To  Surplus $4,000 

"    Treasury  Stock 1,000 

§  109.    Donated  Stock — Second  Method  of  Entry 

The  objection  to  the  first  method  of  recording  donated 
stock  lies  in  the  fact  that  it  shows  an  apparent  profit  before 
active  corporate  operations  have  begun,  or  even  before  the 
company  has  become  well  established.  At  this  stage,  when 
the  corporation's  sole  assets  are  the.  property  taken  over 
and  the  stock  which  has  been  donated  to  it  (the  value  of 
which  really  rests  upon  this  same  property),  any  profits 
shown  could  hardly  be  other  than  fictitious;  certainly  not 
unless  the  property  for  which  the  stock  was  originally  is- 
sued was  actually  worth  as  much  or  more  than  the  face 
value  of  the  stock,  in  which  case  a  real  profit  from  donated 
stock  would  result.  In  practice,  the  value  of  property  taken 
over  by  a  corporation  is  seldom  conservatively  estimated, 
and  the  apparent  profits  from  donated  stock  are  therefore 
usually  fictitious  and  misleading. 

Under  the  second  method  of  entry,  donated  stock  is 
considered  as  a  concession  on  the  price  of  the  property  for 


TREASURY    STOCK 


123 


which  it  was  issued,  and  the  value  of  the  returned  stock  is 
accordingly  credited  to  this  same  property  account.  This 
reduces  the  book  cost  of  the  property  to  the  corporation, 
but  does  not  show  the  immediate  and  usually  fictitious  profit 
that  is  shown  by  the  first  method  of  entry.  The  method  is 
therefore  more  conservative  than  the  one  first  presented 
and  is  to  be  preferred,  especially  in  cases  where  the  property 
was  overvalued  at  the  time  of  incorporation. 

Thus,  if  a  corporation  is  formed  with  a  capital  stock 
of  $100,000  and  this  entire  amount  is  issued  in  payment  for 
patent  rights,  and  $25,000  face  value  of  this  stock  is  then 
returned  to  the  corporation,  the  entries  under  the  second 
method  would  be  as  follows : 

Patent  Rights $100,000 

To  Capital  Stock $100,000 

Entire  capital  stock  issued  in  exchange  for 
patent  rights.  See  page  ...  of  minute 
book. 

When  the  donation  of  $25,000  face  value  of  the  stock 
is  received,  it  is  credited  to  "Patent  Rights"  at  the  price  at 
which  it  is  expected  to  be  sold.  Thus,  if  the  $25,000  face 
value  of  stock  returned  was  expected  to  bring  $50  per  share, 
the  entry  would  be  as  follows: 

Treasury  Stock $12,500 

To  Patent  Rights .        $12,500 

For  250  shares  of  stock  valued  at  $50  per 
share,  donated  to  treasury  for  purposes  of 
the  corporation. 

If  this  Stock  is  sold  at  the  price  expected,  the  cash  entry 
would  show  the  following  debits  and  credits : 

Cash $12,500 

To  Treasury  Stock $12,500 

For  250  shares  of  treasury  stock  sold  at  $50 
per  share. 


124 


SPECIAL    ENTRIES 


If,  however,  the  stock  should  sell  at  more  than  $50 
per  share,  say  $60  per  share,  the  excess  must  go  to  Patent 
Rights  in  order  to  show  the  true  rebate  or  concession  made 
on  the  price.    The  entry  would  therefore  be  as  follows : 

Cash $15,000 

To  Treasury  Stock $12,500 

"    Patent  Rights 2,500 

For  250  shares  of  treasury  stock  sold  at  $60 
per  share.  Originally  credited  to  Patent 
Rights  at  $50  per  share. 

Likewise,  if  the  stock  sold  at  less  than  $50  per  share, 
say  $40,  the  deficiency  must  be  debited  to  Patent  Rights, 
as  shown  in  the  following  entry : 

Cash $10,000 

Patent  Rights 2,500 

To  Treasury  Stock $12,500 

This  reduces  the  net  credit  on  patent  rights  to  the 
amount  actually  realized  from  the  sale  of  the  treasury  stock. 

The  advantage  of  the  second  method  of  handling  do- 
nated stock  lies  in  its  conservative  presentation  of  the 
conditions.  Under  the  first  method,  as  already  stated,  a 
profit  is  shown  before  the  corporation  has  even  begun  its 
active  operations.  Under  the  second  method,  no  immediate 
profit  is  shown  as  a  result  of  the  stock  donation.  Perhaps 
at  some  later  date  when  the  books  are  balanced,  an  inventory 
of  the  property  will  show  a  value  in  excess  of  its  cost ;  this 
gain  is  real,  and  might  then — unless  conservative  account- 
ing practice  prohibits — properly  be  transferred  to  Surplus. 

An  objection  sometimes  urged  against  the  second  method 
of  entering  donated  stock  is  the  fact  that  the  entry  may,  by 
inference,  cast  some  reflection  upon  the  directors'  usual 
statement  in  their  resolution  of  acceptance,  that  the  property 
"is  of  the  reasonable  value  of  the  stock  issued  therefor." 


TREASURY    STOCK 


125 


This  is  a  matter  for  the  treasurer  of  the  corporation  and 
the  directors  to  consider  and  decide  for  themselves.  The 
objection  has  no  legal  weight. 

§  no.    Bonus  Paid  in  Stock 

Stock  given  in  bonuses  is  issued  without  any  direct  con- 
sideration, and  as  an  extra  inducement  to  purchasers.  Such 
issues  are  not  necessarily  improper  as  they  usually  promote 
the  sale  of  bonds,  preferred  stock,  or  other  securities,  and 
thus  directly  benefit  the  corporation.  The  particular  stock 
given  as  a  bonus,  however,  apparently  goes  without  direct 
consideration,  and  will,  as  a  matter  of  course,  be  taken 
from  treasury  stock.  A  "Bonus"  account  is  opened,  and  the 
entries  are  made  on  the  basis  of  the  price  at  which  the 
stock  was  debited  to  Treasury  Stock  account. 

Thus,  if  $10,000  face  value  of  common  stock  is  given 
from  treasury  stock  as  a  bonus  to  the  purchasers  of  a  like 
amount  of  preferred  stock,  and  this  common  stock  had  been 
debited  to  Treasury  Stock  account  at  50  cents  on  the  dollar, 
the  entry  would  be  as  follows: 

Bonus $5,000 

To  Treasury  Stock $5,000 

For  100  shares  of  stock  originally  entered  at  $50 
per  share,  given  as  a  bonus  with  100  shares  of 
preferred  stock  sold  at  par. 

Bonus  account  would  thereafter  be  treated  as  part  of 
the  organization  expenses  which  are  generally  written  off 
over  a  period  of  years. 

Original  stock  might  be  issued  as  bonus  stock  so  long 
as  no  one  offers  objection,  but,  since  it  would  not  in  that 
case  be  full-paid  stock,  the  holders  would  remain  liable  to 
corporate  creditors  for  the  full  face  value  in  case  of  in- 
solvency.    In  any  such  case  the  outgoing  stock  would  be 


126  SPECIAL    ENTRIES 

debited  to  Bonus  account  and  credited  to  Capital  Stock  or 
Unissued  Stock,  as  the  case  might  be. 

§  III.    Purchase  and  Sale  of  Corporation's  Own  Stock 

A  corporation  may  issue  its  capital  stock  in  exchange 
for  cash,  property,  or  services.  It  does  not,  however,  as  a 
rule  have  the  right  to  purchase  back  such  stock  without 
statutory  or  special  permission  from  the  state  in  which 
it  was  incorporated;  and  even  then,  charter  authority  or 
sanction  of  the  stockholders  may  be  required.  This  is  so 
because  the  purchase  of  its  own  stock  by  a  corporation  is 
practically  a  reduction  of  its  capital  stock,  and  such  a 
reduction  can  be  effected  only  by  permission  of  the  state  and 
by  following  the  legal  procedure  prescribed. 

There  are  many  instances  of  companies  having  purchased 
their  own  stock,  but  the  authority  under  which  it  is  done 
can  be  determined  only  after  an  inspection  of  the  statutes 
of  the  particular  state  and  the  charter  and  by-laws  of  the 
particular  corporation.  Sometimes  an  issue  of  preferred 
stock  provides  for  its  redemption  or  repurchase  at  specified 
dates  or  periods,  or  at  the  option  of  the  company  officials. 
When  such  an  issue  is  contemplated,  a  careful  investigation 
should  be  made  to  determine  whether  the  proposed  redemp- 
tion is  legally  possible. 

When  a  company  purchases  its  own  stock,  it  is  not 
usually  as  an  investment,  but  in  pursuance  of  some  pre- 
arranged plan  or  for  the  protection  of  its  own  interests  in 
some  way.  Stock  so  secured  should  be  charged  to  Treasury 
Stock.  Stock  bought  back  does  not  have  the  voting  right 
while  in  possession  of  the  corporation,  nor  may  it  participate 
in  dividends. 

Stock  which  has  come  back  into  the  possession  of  a 
company  may,  as  a  rule,  be  sold  again  on  the  open  market. 
As  to  whether  or  not  it  may  be  sold  at  a  discount  depends 


TREASURY    STOCK 


127 


upon  circumstances.  It  is  apparent  that  it  may  not  be  resold 
for  less  than  it  cost  if  such  sale  would  impair  the  capital. 
This  would  not,  of  course,  be  the  case  with  stock  which 
has  already  been  issued  full-paid  and  then  donated  back 
to  the  company.  Stock  cancelled  for  non-payment  of  in- 
stalments may  be  resold,  but  the  selling  price  should  be  high 
enough  to  bring,  in  connection  with  any  payments  already 
received,  at  least  the  par  value  of  the  shares  involved. 

§  112.    Entries  for  Purchase  and  Sale  of  Corporation's  Own 
Stock 

To  illustrate  the  accounting  treatment  of  transactions 
in  a  company's  own  stock,  suppose  that  a  company  has 
purchased  500  shares  of  its  full-paid  stock  for  $45,000,  and 
that  after  holding  it  for  a  time,  250  shares  have  been  resold 
for  $25,500  (200  shares  for  $20,000,  and  50  shares  for 
$5,500).  Later  the  company  made  two  sales  of  125  shares 
each  at  $90,  closing  out  the  balance  of  the  stock.  The 
entries  are  as  follows: 

First  Entry 

Treasury  Stock $45,000 

To  Cash $45,000 

For  purchase  of  500  shares  full-paid  stock  of 
this  Company  at  $90  per  share. 

Second  Entry 

Cash $25,500 

To  Treasury  Stock $25,500 

For  the  sale  of  250  shares  of  treasury  stock. 
200  shares  @  100  and  50  shares  @  no. 

The  third  and  fourth  entries  recording  the  further  sales 
would  be  similar  to  the  second  entry,  varying  only  as  to 
amounts. 


128  SPECIAL    ENTRIES 

Fifth  Entry 

Treasury  Stock $3,ooo 

To  Profit  and  Loss  (or  Surplus) $3,000 

For  profits  realized  on  the  purchase  and  sale  of 
treasury  stock. 

Profits  of  this  nature,  while  technically  available  for 
dividends,  are  preferably  credited  to  Surplus  or  held  in 
some  special  reserve  account. 

Transactions  in  Stock  of  Other  Corporations 

§  113.    Purchase  and  Sale  of  Stock  of  Other  Corporations 

A  corporation  may  acquire  the  stock  of  another  corpora- 
tion only  when  it  is  expressly  authorized  to  do  so  by  its 
charter  or  by  the  statutes  of  the  state.  But  cases  have  fre- 
quently arisen  in  which  the  circumstances  were  such  that 
the  courts  have  sanctioned  such  purchases — as,  for  instance, 
stock  held  as  security  for  a  debt  and  bought  in — even 
though  both  the  law  and  the  charter  of  the  corporation  were 
silent  in  this  respect.  Permission  to  purchase  stocks  of 
other  companies  is  given  by  the  statutes  of  several  of  the 
states,  but  it  is  usually  required  that  the  stock  thus  pur- 
chased shall  not  be  that  of  a  competing  company.  In  some 
cases  it  is  left  to  the  incorporators  themselves  to  define  in 
the  charter  to  what  extent  securities  of  other  companies 
may  be  held  or  purchased.  In  New  York,  power  is  granted 
corporations  to  hold  stock  in  similar  or  related  corporations 
by  proper  charter  provisions;  and  when  one  corporation 
holds  stock  in  another,  its  directors  or  officers  are  eligible 
as  directors  in  the  other  corporation  but  they  cannot  vote 
the  stock  of  any  competing  corporation.  Similar  power 
is  given  in  New  Jersey,  Pennsylvania,  Illinois,  and  many 
other  states,  while  in  some  states  such  purchase  of  stock  is 
prohibited.  New  Jersey  corporations  are  given  unrestricted 
authority  to  purchase  stocks  of  other  corporations. 


STOCK    OF    OTHER    CORPORATIONS 


129 


In  some  states  "holding  companies"  may  be  organized, 
whose  purpose  is  not  to  carry  on  any  active  business,  but 
merely  to  purchase  and  hold  the  stocks,  bonds,  and  securities 
of  other  corporations,  the  same  as  individuals  might.  The 
"holding  company"  secures  a  controlling  interest  in  its  sub- 
sidiary companies,  which  has  the  effect  of  merging  or 
consolidating  all  of  the  separate  operating  companies  under 
one  management,  and  it  derives  its  revenue  entirely  from 
the  dividends  on  the  stock  of  these  underlying  companies. 
The  United  States  Steel  Corporation  is  a  holding  company, 
and  owns  the  stock  of  various  underlying  companies 
which  in  turn  are  known  as  "operating  companies."  (See 
Chapter  XXXI.) 

When  stock  of  another  corporation  is  purchased,  it  is 
not  treasury  stock  of  the  corporation  which  acquires  it,  but 
an  investment,  and  goes  into  an  entirely  separate  and  dis- 
tinct account  headed  "Investments,"  or  "Stocks  of  Other 
Companies,"  or  some  other  distinguishing  caption.  If  bonds 
are  included  in  the  purchase,  the  account  might  be  headed 
"Securities  of  Other  Companies,"  or  else  "Stocks  and  Bonds 
of  Other  Companies" ;  or  separate  accounts  might  be  opened 
for  each  class  of  security  or  even  for  each  security.  Such 
investments  are  usually  entered  up  at  the  cost  price,  and, 
when  sold,  at  the  selling  price.  The  profit  or  loss  sustained 
as  a  result  of  the  sale  will,  of  course,  be  closed  into  the 
Profit  and  Loss  account. 

§  114.     Entries  for  Purchase  and  Sale  of  Stock  of  Other 
Corporations 

To  illustrate  the  entries  involved,  assume  that  the  Ameri- 
can Trading  Company  has  purchased  $300,000  par  value  of 
stock  of  the  Baldwin  Mercantile  Company  for  $250,000. 
It  later  disposes  of  $40,000  face  value  of  this  stock  for 
$50,000,  thereby  netting  a  profit  of  $10,000.     Later  the 


130 


SPECIAL    ENTRIES 


Baldwin  Mercantile  Company  declares  a  6%  dividend.  The 
following  entries  are  required  for  proper  record  of  the 
transactions  in  stock: 

Stocks  of  Other  Companies  (or  "Stock  of  Bald- 
win Mercantile  Company") $250,000 

To  Cash $250,000 

For  purchase  of  $300,000  par  value  of  stock 
of  the  Baldwin  Mercantile  Company. 

Cash $50,000 

To  Stocks  of  Other  Companies $50,000 

For  sale  of  $40,000  par  value  of  stock  of 
the  Baldwin  Mercantile  Company. 

Stocks  of  Other  Companies $10,000 

To  Profit  and  Loss  (or  Surplus) $10,000 

For  profit  on  sale  of  $40,000  of  stock  in 
Baldwin  Mercantile  Company. 

The  second  and  third  entries  could  easily  be  combined. 
When  the  6%  dividend  is  declared  by  the  underlying  com- 
pany and  paid  over  to  the  holding  company,  an  entry  similar 
to  the  following  is  required : 

Cash $15,600 

To  Income  Account  (or*"Dividends  on  In- 
vestments")      $15,600 

For  dividend  of  6%  on  $260,000  par  of  stock 
of  the  Baldwin  Mercantile  Company. 

§  115.     Entries  When  Stock  Is  Exchanged  for  Stock  of 
Other  Corporations 

In  cases  where  the  purchase  of  securities  in  other  cor- 
porations is  sanctioned  by  statute  or  by  charter,  the  manner 
of  making  payment  is  usually  left  to  the  contracting  parties. 
The  stock  of  another  company,  instead  of  being  purchased 
for  cash,  might  therefore,  if  the  state  laws  permit,  be  ob- 


STOCK    OF    OTHER    CORPORATIONS 


131 


tained  in  exchange  for  the  stock  of  the  acquiring  company. 
To  illustrate  the  entries  when  this  is  done,  assume  that 
the  Delaware  Manufacturing  Company  has  been  organized 
with  a  capital  stock  of  $1,000,000,  comprising  10,000  shares 
of  the  par  value  of  $100  each,  of  which  1,000  shares  have 
been  subscribed  and  paid  for  in  cash.  Additional  stock 
of  the  company  has  been  disposed  of  as  follows: 

1.  3,000  shares  in  exchange  for  2,500  shares  of  stock, 

$100  each,  of  the  Hudson  Manufacturing  Com- 
pany. 

2.  1,000  shares  in  exchange  for  1,200  shares  in  the 

Superior  Textile  Company. 

3.  1,000  shares  in  exchange  for  1,000  shares  in  the 

Brown  Cloth  Company. 

4.  1,000  shares  in  exchange  for  500  shares  of  the 

Southern  Cotton  Company. 

First  Entry 

Unissued  Stock $1,000,000 

To  Capital  Stock $1,000,000 

The  Delaware  Manufacturing  Company 
is  incorporated  with  an  authorized 
capital  stock  of  $1,000,000. 

Second  Entry 

Cash $100,000 

To  Unissued  Stock $100,000 

For  1,000  shares  of  stock  sold  for  cash  to 
the  following  persons : 

(Names  stated) 

Third  Entry 

Stocks  of  Other  Companies $300,000 

To  Unissued  Stock $300,000 

For  purchase  of  2,500  shares  of  the 
Hudson  Manufacturing  Company  in 
exchange  for  3,000  shares  of  this  Com- 
pany. 


132 


SPECIAL    ENTRIES 


Fourth  Entry 

Stocks  of  Other  Companies $100,000 

To  Unissued  Stock $100,000 

In    exchange    for    1,200    shares   of   the 
Superior  Textile  Company. 

Fifth  Entry 

Stocks  of  Other  Companies $100,000 

To  Unissued  Stock $100,000 

In    exchange    for    1,000    shares    of    the 
Brown  Cloth  Company. 

Sixth  Entry 

Stocks  of  Other  Companies $100,000 

To  Unissued  Stock $100,000 

In    exchange    for    500    shares    of    the 
Southern  Cotton  Company. 

Entries  3  to  6  inclusive  might  easily  be  consolidated.  It 
will  be  seen  that  the  stock  has  been  issued  at  par  and  that 
each  lot  of  stock  in  other  companies  has  been  valued  at  the 
par  value  of  the  stock  given  for  it.  The  unsold  stock,  num- 
bering 3,000  shares,  the  par  value  of  which  is  $300,000, 
will  stand  as  a  debit  balance  to  Unissued  Stock  until  sold. 


CHAPTER    IX 

DIVIDENDS    AND    THEIR    ENTRY 

§  ii6.    The  Nature  of  Dividends 

Dividends  are  corporate  profits  which  have  been  set  aside 
by  formal  action  of  the  directors  for  distribution  among  the 
stockholders.  The  corporate  books  are  periodically  bal- 
anced, the  profits  determined,  and  the  directors  then  decide 
what  portion,  if  any,  of  these  profits  shall  be  withdrawn  for 
division  among  the  stockholders.  If  a  dividend  is  voted,  or 
as  it  is  termed,  "declared,"  it  is  in  the  shape  either  of  a 
percentage  on  the  par  value  of  the  outstanding  stock,  or  a 
fixed  amount  on  each  share.  The  amount  received  by  each 
stockholder  is  therefore  determined  by  the  number  of  shares 
he  holds. 

§  117.    Directors'  Powers  as  to  Dividends 

It  is  a  well-recognized  principle  of  law  that  the  directors 
of  a  corporation,  alone,  have  the  power  to  declare  a  dividend 
out  of  the  earnings  of  the  corporation  and  to  determine  its 
amount.  This  right  of  directors  is  incident  to  their  general 
power  to  manage  the  affairs  of  the  corporation,  and  is 
recognized  either  directly  or  by  implication  by  the  laws  of 
every  state  in  the  Union.  The  right  is,  of  course,  subor- 
dinate to  any  statutory,  charter,  or  by-law  provisions  which 
may  apply ;  but  beyond  this  the  whole  matter  is  in  the  dis- 
cretion of  the  board  of  directors. 

Usually  in  small  companies  the  by-law  provisions  re- 
lating to  dividends  merely  provide  that  dividends  shall  be 
declared  from  surplus  profits  at  such  times  as  the  board  may 
direct.    The  by-laws  of  the  larger  companies,  however,  are 

133 


134  SPECIAL    ENTRIES 

generally  more  explicit,  as  for  example,  directing  the  board 
— if  profits  permit — to  declare  dividends  on  the  first  of  each 
year,  or  at  the  regular  meetings  in  January  and  July,  or  on 
some  other  specific  date. 

If  the  directors,  at  the  regular  time  for  declaring  a  divi- 
dend, decide  not  to  declare  one,  they  are  said  to  have  "passed 
the  dividend." 

§  ii8.    Informal  Distribution  of  Corporate  Profits 

Corporate  profits  are  occasionally  distributed  among 
stockholders  without  the  formality  of  declaring  a  dividend 
— a  valid  proceeding  if  all  the  stockholders  consent.  Where 
the  corporation  is  small,  the  distribution  of  profits  is  some- 
times effected  without  recourse  to  dividends,  by  means  of 
salaries  which  therefore  sometimes  appear  unreasonably 
large.  In  such  cases  all  the  stockholders  are  usually  also 
officials- of  the  corporation,  and  thus  all  participate  in  this 
informal  division  of  profits.  This  plan  is  permissible  only 
when  all  the  parties  interested  assent  and  no  improper  ends 
are  to  be  attained  thereby.  When,  however,  such  salaries 
are  paid  for  the  sake  of  concealing  profits,  with  a  more  or 
less  fraudulent  intent,  the  courts  hold  them  as  "dividends 
of  profits  under  another  name,  put  in  that  guise  for  con- 
cealment and  delusion."  (Rubber  Co.  v.  Goodyear,  9  Wall 
[N.  Y.]  788  [1869].) 

§  119.    Surplus — Equalizing  Dividends 

While  dividends  must,  if  declared,  be  declared  from 
earnings,  the  capital  being  kept  intact  for  the  protection  of 
the  creditors  of  the  corporation,  it  is  not  obligatory  on  the 
directors  to  distribute  all  the  net  profits  and  it  would  be 
poor  policy  to  do  so.  A  surplus  should  be  accumulated  to 
meet  unexpected  losses  and  for  other  unforeseen  contin- 
gencies.   When  this  is  done,  if  it  seems  wise,  this  surplus 


i 


DIVIDENDS    AND    THElR    ENTRY 


135 


may  be  drawn  upon  to  pay  dividends  in  poor  years  when 
the  profits  are  not  sufficient  for  that  purpose,  and  in  this 
way  dividends  be  equalized.  The  advantage  of  this  is 
obvious. 

§  120.    Declaration  of  Dividends 

Dividends  may  be  declared  payable  to  the  stockholders 
of  record  on  and  after  the  day  of  the  declaration,  or  on  a 
specified  later  day,  but  could  not  be  declared  payable  to  the 
stockholders  who  were  of  record  on  a  day  prior  to  the 
announcement.  This  is  obvious,  as  such  stockholders  might 
no  longer  be  stockholders  when  the  dividend  was  declared. 

Many  companies  close  the  transfer  books  for  a  certain 
number  of  days  before  payment  of  dividends,  so  as  to  avoid 
the  confusion  occasioned  by  making  transfers  before  all  of 
the  dividend  checks  are  made  out;  and  during  that  period 
refuse  to  recognize  any  change  in  the  ownership  of  stock. 
(See  §  62.)  Other  companies  make  it  a  point  to  announce 
in  their  dividend  notices  that  "books  will  not  close"  or 
"books  will  remain  open."  During  the  days  the  transfer 
books  remain  closed,  stock  of  the  company  which  is  sold 
goes  "ex-dividend,"  that  is,  without  the  dividend.  In  other 
words,  the  dividend  will  not  be  paid  to  the  purchaser,  but 
to  the  one  in  whose  name  the  stock  stands  on  the  company's 
books. 

A  customary  form  of  the  resolution  of  the  board  of 
directors  declaring  a  dividend  is  as  follows: 

Resolved,  that  the  regular  semiannual  dividend  of  four  per  cent 
(4%)  from  surplus  profits  be  and  hereby  is  declared  upon  the  common 
stock  of  the  Company,  payable  upon  the  20th  day  of  October,  1916,  to 
the  stockholders  of  record  as  shown  by  the  books  of  the  Company  on 
the  loth  day  of  January,  1916,  and  that  the  Treasurer  of  the  Company 
be;  and  hereby  is  authorized  and  directed  to  pay  said  dividend  in 
accordance  with  the  terms  of  the  present  resolution. 

Resolution  Declaring  Dividend 


136  SPECIAL    ENTRIES 

§121.    Notice  of  Dividend 

Among  the  smaller  corporations  the  secretary  usually 
sends  notice  to  the  stockholders  when  a  dividend  is  declared, 
notifying  them  of  the  rate  and  sometimes  the  amount,  date 
of  payment,  and  any  other  details  of  importance.  A  notice 
of  this  kind  may  be  either  printed  or  typewritten. 

Among  the  larger  corporations  it  is  usual,  after  passing 
the  resolution  declaring  a  dividend,  to  publish  a  notice  of 
this  dividend  in  the  daily  papers.  The  following  is  a  typical 
dividend  notice : 

Fulton  Coal  Company 

General  Office,  Reading  Terminal 
Philadelphia 

July  17,  1916 
The  Directors  have  declared  a  dividend  of  fifty  cents   (soc)  per 
share,  payable  on  Monday,  July  24,  1916,  to  the  stockholders  as  they 
stand  registered  on  the  books  of  the  Company  at  the  close  of  business 
July  17,  1916. 

The  transfer  books  of  the  Company  will  be  closed  until  July  25, 
1916. 

W.  G.  Brown, 

Secretary 
Dividend  Notice — Publication 

§  122.    Ownership  of  Dividends 

When  a  dividend  from  the  net  profits  of  a  corporation 
has  once  been  legally  and  publicly  declared,  it  cannot  there- 
after be  rescinded  or  annulled,  but  its  amount  is  immediately 
transferred  from  the  corporate  ownership  to  the  ownership 
of  the  stockholders ;  and  this  principle  holds  even  though  at 
the  time  it  was  declared  no  definite  date  was  fixed  for  its 
payment.  If,  however,  a  dividend  has  been  declared  but 
this  fact  has  not  been  made  public,  being  known  only  to 
the  directors,  they  may  rescind  it.  Also,  if  it  were  illegal, 
a  dividend  formally  declared  and  announced  might  be  re- 
voked at  any  time  before  payment.    Should  the  board,  for 


DIVIDENDS    AND    THEIR    ENTRY  13- 

example,  declare  a  dividend  in  defiance  of  or  in  ignorance 
of  the  fact  that  there  were  no  profits  from  which  it  might 
legally  be  taken,  they  might  revoke  it  at  any  time  before  it 
was  actually  paid. 

As  soon  as  the  day  appointed  for  payment  of  a  dividend 
is  reached,  the  dividend  becomes  due  and  payable,  and  the 
stockholders  can  enforce  its  payment  by  legal  procedure. 

§  123.    Payment  of  Dividends 

When  a  dividend  is  declared,  its  amount  is  credited  to 
Dividend  account  (§83)  and  debited  to  Profit  and  Loss  or 
Surplus.  In  the  smaller  corporations  dividends  are  usually 
paid  by  check  on  the  general  bank  account,  just  as  in  the 
case  of  any  other  company  payment.  Cash  account  is 
credited  and  Dividend  account  debited  as  the  dividend  checks 
are  drawn.  In  the  larger  corporations  it  is  usual  to  draw 
one  check  payable  to  the  bank  for  the  total  amount  of  the 
dividend,  and  this  check  is  entered  in  the  cash  book  and 
posted  to  Dividend  account  in  the  ledger.  This  closes  the 
account,  and  the  general  books  of  the  company  are  no  longer 
concerned  with  that  particular  dividend,  no  matter  how 
long  some  of  the  stockholders  may  hold  their  dividend  checks 
before  getting  them  cashed. 

The  check  for  the  total  dividend  is  deposited  in  the  bank 
to  the  credit  of  a  special  account — as  for  instance,  "Kingston 
Steel  Works — Dividends"  or  "William  Kingston,  Treas- 
urer"—-or  even  in  another  bank  than  that  in  which  the 
corporation  keeps  its  main  deposit,  and  the  individual  divi- 
dend checks  are  drawn  on  this  account,  using  a  special  check 
book.  These  are  mailed  or  otherwise  delivered  to  their 
owners,  and,  from  the  bank's  statement  of  the  dividend 
account,  it  can  be  seen  at  any  time  which  stockholders  have 
not,  up  to  that  time,  drawn  their  money.  This  need  not 
concern  the  general  books  of  the  corporation,  however,  be- 


138  SPECIAL    ENTRIES 

cause  the  entire  matter  is  now  outside  the  usual  course  of 
business;  and  even  though  there  are  outstanding  unpaid 
dividend  checks,  the  balance  in  the  account  need  not  neces- 
sarily show  on  the  balance  sheet. 

Instead  of  the  plan  just  outlined  some  (though  few) 
large  corporations  make  no  entries  for  dividend  payments 
on  the  cash  book  until  the  dividend  checks  are  paid  at  the 
bank.  As  reports  are  received  from  the  bank,  entries  are 
made  debiting  Dividend  account  and  crediting  Cash.*  Under 
this  plan  the  credit  balance  of  the  Dividend  account  will 
show  at  any  time  the  amount  of  the  dividend  still  unpaid. 
It  is  not  unusual  for  dividend  checks  to  remain  unpaid  for 
a  considerable  time  or  even  indefinitely,  in  which  case  this 
plan  of  recording  dividend  payments  has  some  advantages. 
The  Cash  account  in  this  case  is  also  made  to  show  its 
correct  status,  so  that  dividend  checks  outstanding  do  not 
have  to  be  deducted  in  arriving  at  the  correct  balance  of  the 
dividend  cash. 

The  larger  corporations  with  many  stockholders  usually 
have  specially  printed  dividend  checks,  giving  the  date  and 
number  of  the  dividend.  By  means  of  an  addressing  ma- 
chine, the  name  and  address  of  the  stockholder  are  stamped 
on  the  face  of  the  check  in  the  lower  left  hand  comer,  after 
which  the  amount  is  filled  in  on  the  typewriter  or  other 
printing  machine.  After  the  checks  and  amounts  are  veri- 
fied, proved  on  the  adding  machine,  and  signed  by  the  proper 
officials,  they  are  placed  in  window  envelopes  for  mailing. 

§  124.    Dividend  Sheet  or  Book 

The  practice  of  setting  aside  each  quarter  or  half-year 
in  a  separate  bank  account  the  exact  amount  required  for 
the  payment  of  dividends,  and  drawing  special  checks  against 
this  fund,  keeps  dividend  cash  entirely  separate  from  the 

•Daily  statements  are  received  from  the  bank  along  with  cancelled  checks  from 
the  previous  day. 


DIVIDENDS    AND    THEIR    ENTRY 


139 


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DIVIDENDS    AND    THEIR    ENTRY  j^i 

general  cash  of  the  company.  A  dividend  sheet  or  book 
similar  to  those  on  pages  139,  140,  should  be  prepared  each 
time,  showing  the  names  of  stockholders,  date  of  dividend, 
amount  and  number  of  each  check,  etc.  As  the  checks  are 
paid  a  record  may  be  made  in  this  book,  if  desired,  but 
where  the  names  are  numerous  this  is  hardly  worth  while. 

The  dividend  sheet  or  book  contains  a  list  of  the  stock- 
holders entitled  to  receive  dividends.  This  list  is  usually 
made  up  from  the  stock  ledger  each  time  a  dividend  is  de- 
clared, after  the  transfer  books  are  closed,  though  in  the 
case  of  companies  with  but  few  stockholders  this  is  not 
necessary.  When  the  stockholders  are  many  and  the  stock 
active,  it  is  very  necessary  that  these  lists  be  compiled,  and 
that  care  be  taken  in  checking  up  and  proving  the  amounts 
which  are  to  be  paid. 

The  bound  dividend  book  is  used,  if  at  all,  only  by  small 
companies  whose  stock  is  not  active ;  the  larger  corporations 
using  loose  sheets  and  placing  them  in  binders  for  con- 
venience. These  sheets,  if  bound  together,  would  constitute 
the  ordinary  dividend  book.  Two  forms  of  dividend  sheet 
are  shown  on  pages  139,  140,  illustrating  two  methods  of 
paying  dividends. 

f  Where  stockholders  come  to  the  office  of  the  corporation 
or  to  the  bank  for  their  dividends,  a  space  is  allowed  on  the 
dividend  sheet  for  their  signatures.  Some  companies  prefer 
this  plan  as  it  keeps  the  stockholders  in  touch  with  the 
corporation  and  its  business.  Most  companies,  however, 
have  adopted  the  plan  of  mailing  all  dividend  checks,  and 
these  are  always  made  payable  to  order.  The  indorsement 
of  the  check  is  then  considered  a  sufficient  receipt,  and  the 
receipt  column  is  unnecessary. 

§  125.    Entries  for  Cash  Dividends 

To  illustrate  a  simple  form  of  entering  cash  dividends. 


142 


SPECIAL    ENTRIES 


suppose  the  net  profits  of  the  Kingston  Steel  Works  for  the 
year  191 5  amounted  to  $38,690.40.  The  directors  have 
declared  the  regular  annual  dividend  of  5%  on  the  $500,000 
of  outstanding  paid-up  capital  stock,  payable  in  cash  in  ten 
days,  the  remaining  profits  going  to  surplus.  The  dividend 
is  the  seventh  annual  dividend  that  has  been  declared. 

The  entries  for  the  declared  dividend  and  for  paying  it 
are  as  follows : 

January  7,  1916 

Profit  and  Loss $38,690.40 

To  Dividend  No.  7 $25,000.00 

"    Surplus 13,690.40 

Seventh  annual  dividend  of  5%  on  the 
outstanding  capital  stock  of  the  Com- 
pany declared  this  day  by  the  board 
of  directors  and  payable  January  17, 
1916. 

January  17,  1916 

Dividend  No.  7 $25,000 

To  Cash $25,000 

For  payment  of  dividend  No.  7,  as  per 
order  of  the  directors. 

In  many  cases  no  Dividend  account  is  opened,  in  which 
case  the  dividends  paid  are  charged  direct  to  Profit  and  Loss 
or  to  Surplus  account,  the  entries  for  the  foregoing  transac- 
tion being  as  follows : 

January  7,  1916 

Profit  and  Loss $38,690.40 

To  Surplus $38,690.40 

January  17,  1916 

Surplus  $25,000 

To  Cash $25,000 

Payment  of  the  seventh  annua!  dividend 
of  5%  on  the  outstanding  stock  of  the 
Company,  declared  January  7,  1916, 
and  payable  January  17,  1916. 


DIVIDENDS    AND    THEIR    ENTRY 


143 


If  a  special  bank  account  is  set  apart  for  dividend  checks, 
the  transfer  of  dividend  cash  is  made  as  explained  in  §  123, 
by  drawing  one  check  for  the  required  amount,  Dividend 
or  Surplus  account  being  debited  and  Cash  credited.  The 
individual  checks  are  then  issued  by  the  officers  in  charge 
of  the  dividend  disbursements. 

When  dividends  are  paid  quarterly,  the  current  credit 
entries  to  Dividend  account  are  sometimes  omitted  entirely, 
the  cash  payments  being  debited  to  Dividend  account,  which 
once  or  twice  a  year  is  closed  into  Surplus  account. 

§  126.    Dividends  Paid  with  Borrowed  Money       ^^>^ 

It  is  not  unusual  for  even  the  most  prosperous  company 
to  be  temporarily  short  of  ready  cash  to  meet  dividend  pay- 
ments. The  current  assets  may  be  three  times  as  much  as 
the  current  liabilities,  and  yet  consist  largely  of  notes  and 
accounts  receivable  which  cannot  be  used  to  pay  dividends. 
In  such  a  case  it  is  perfectly  proper  for  the  directors  to 
borrow  money  to  pay  a  dividend.  In  that  event  the  follow- 
ing entries  might  be  made,  the  first  a  journal  entry,  all 
the  others  cash  book  entries: 

Firsl  Entry  j^„^^^ry  ^^  ^^^g 

Surplus   $10,000 

To  Dividend  Payable $10,000 

Dividend  of  5%  declared  this  day  on  capital 
stock  of  the  Company.  Payable  in  cash 
January  15,  1916. 

Second  Entry  January  13,  1916 

Cash $10,000 

To  Notes  Payable $10,000 

Three  months'  note  discounted  at  First 
National  Bank  to  secure  funds  for  pciy- 
ment  of  dividend  due  January  15. 


144  SPECIAL    ENTRIES 

Third  Entry 

January  13,  1916 

Discount $150 

To  Cash $150 

Discount  at  6%  on  Company's  three  months' 
note  of  $10,000. 

Fourth  Entry 

January  15,  1916 

Dividend  Payable $10,000 

To  Cash $10,000 

Payment  of  dividend  of  5%  on  capital  stock 
of  the  Company. 

§  127.    Entries  for  Scrip  Dividend 

Another  way  to  pay  a  dividend  when  temporarily  short 
of  cash  is  by  an  issue  of  scrip.  Scrip  is  a  promissory  note  of 
a  corporation,  usually  bearing  interest,  and  falling-  due  upon 
a  specified  date,  or  after  a  specified  occurrence,  as  for  in- 
stance when  a  proposed  bond  issue  shall  have  been  sold. 
The  scrip  is  in  the  form  of  certificates,  on  which  appear  the 
company's  promise  to  pay  the  money  and  the  various  terms 
of  the  contract.  These  certificates  sometimes  call  for  or  are 
convertible  into  stock  of  the  company,  and  such  scrip  some- 
times participates  in  dividends.  The  scrip  certificates  are 
frequently  transferable,  and  pass  by  assignment  from  hand 
to  hand  in  the  open  market. 

The  Novelty  Manufacturing  Company  with  a  capital 
stock  of  $1,500,000,  $1,000,000  being  common  stock  and 
$500,000  preferred  stock,  declares  its  regular  annual  divi- 
dend of  3%  on  both  issues,  payable  in  scrip.  Dividend  de- 
clared May  15,  1916,  payable  June  15,  1916;  scrip  payable 
in  cash  June  15,  191 7. 

The  journal  entries  for  the  declaration  and  payment  of 
this  annual  3%  scrip  dividend  on  the  common  and  pre- 
ferred stock  are  as  follows: 


DIVIDENDS    AND    THEIR    ENTRY  145 

First  Entry 

May  15,  1916 

Surplus  $45,000 

To  Dividend — Common $30,000 

"    Dividend — Preferred 15,000 

Annual  dividend  of  3%  on  both  common  and 

preferred  stock  declared  this  day,  payable 

•   June   15,   1916,   in   scrip   of   the   Company, 

maturing  June  15,  1917  and  bearing  interest 

at  5%. 

Second  Entry 

June  15,  1916 

Dividend — Common  $30,000 

Dividend — Preferred  15,000 

To  Dividend  Scrip  (or  Scrip  Payable)  . . .  $45,000 

Dividends   paid   this   day   in    scrip   maturing 
June  15,   1917  and  bearing  interest  at  5%. 

When  the  scrip  matures,  an  entry  similar  to  the  follow- 
ing is  necessary : 

June  15,  1917 

Dividend    Scrip $45,000 

Interest 2,250 

To  Cash $47,250 

For  payment  of  dividend  scrip  maturing  to- 
day, with  interest  from  June  15,  1916  at  5%. 

§  128.    Entries  for  Special  and  Interim  Dividends 

Occasionally,  after  a  very  prosperous  year  or  a  longer 
period  of  prosperity,  during  which  a  large  surplus  has  been 
accumulated,  the  directors  declare  a  "special  dividend"  or 
"bonus"  in  addition  to  the  regular  dividend.  This  is  com- 
monly called  "cutting  a  melon."  Sometimes  the  employees 
of  the  company  are  given  a  portion  of  the  "melon,"  in 
which  case  the  process  is  known  as  "profit-sharing." 

To  illustrate  the  entry  of  such  dividends,  assume  that  a 


146  SPECIAL    ENTRIES 

corporation  with  $1,000,000  capital  stock,  and  profits  for 
the  year  of  $125,400,  declares  its  regular  annual  dividend  of 
7%  and  at  the  same  time  declares  a  "special  dividend"  of 
2%,  and  awards  to  its  employees  a  bonus  of  10%  of  the 
net  earnings  of  the  year  just  ended.  The  entries  are  as 
follows : 

January  4,  1916 

Surplus   $102,540 

To  Dividend  No.  17 $70,000 

"    Special  Dividend  No.  i 20,000 

"    Bonus  to  Employees 12,540 

As  per  resolution  passed  this  day  by  the 
board  of  directors  declaring  the  '■egular 
annual  dividend  of  7%  on  the  capital 
stock  of  the  Company;  an  additional 
dividend  of  2%;  and  awarding  to  the 
employees  a  bonus  of  10%  of  the  net 
earnings  of  the  year  just  ended;  all  pay- 
able in  cash  on  the  15th  day  of  January, 
1916. 

January  15,  19 16 

Dividend  No.  17 $70,000 

Special  Dividend  No.  i 20,000 

Bonus  to  Employees 12,540 

To  Cash , .  $102,540 

For  payment  of  dividends  and  bonus  pro- 
vided for  in  resolution  of  the  board  of 
directors  passed  January  4. 

Dividends  declared  between  the  regular  dividend  dates 
are  called  "interim  dividends,"  and  are  declared  when  un- 
usual profits  exist  to  justify  a  special  dividend,  or  when  for 
some  reason  it  is  desired  to  anticipate  the  regular  dividend  in 
whole  or  in  ;nart.  When  dividends  are  paid  quarterly,  as 
is  the  case  with  most  of  the  larger  corporations,  an  interim 
dividend  is  seldom  if  ever  declared.  The  entries  in  case  of 
interim  dividends,  would  of  course  be  identical  to  those  of 
a  regular  dividend. 


CHAPTER    X 

DIVIDENDS    AND    THEIR    ENTRY 
(Continued) 

§  129.  Entries  for  Dividends  Applied  to  Stock  Subscriptions 

As  a  declared  dividend  is  a  debt  due  from  the  corpora- 
tion to  the  stockholder,  any  indebtedness  of  a  stockholder 
to  the  corporation  may  be  set  off  against  his  dividend  and 
be  deducted  from  it,  provided  the  debt  is  actually  due  at  the 
time  the  dividend  is  payable.  Accordingly,  the  corporation 
has  full  power  to  apply  dividends  in  payment  of  amounts 
due  on  subscriptions  to  its  stock. 

It  may  be  noted  that  a  contract  between  the  corporation 
and  a  subscriber  to  its  stock  providing  that  his  subscription 
shall  be  paid  by  dividends  on  the  stock  subscribed  for,  is 
absolutely  invalid  both  as  against  the  corporation  and  against 
corporate  creditors.  Under  such  an  agreement,  any  credits 
of  declared  dividends  actually  made  would  be  held  a  valid 
payment,  but  in  case  of  the  insolvency  of  the  corporation 
before  the  stock  was  full-paid,  the  stockholder  could  be 
called  upon  to  pay  in  cash  all  amounts  still  due  on  his  sub- 
scription, and  this  regardless  of  the  agreement  that  it  was 
to  be  paid  by  dividends. 

To  illustrate  the  entries  when  dividends  are  to  be  applied 
on  a  stock  subscription,  let  us  suppose  that  $200,000  par 
value  of  new  stock  of  the  Kanawha  Iron  Works  (shares  $50 
each)  has  been  offered  for  sale  to  provide  funds  for  the 
erection  of  additional  buildings;  that  all  this  has  been  sub- 

147 


148  SPECIAL    ENTRIES 

scribed,  and  a  first  instalment  of  50%  has  been  paid  upon 
it.  John  Smith  is  a  subscriber  for  10  shares.  On  January  5, 
19 1 7,  the  board  of  directors  passes  a  resolution  calling  for 
the  final  instalment  of  50%  on  the  entire  subscribed  stock, 
payable  February  i.  On  February  3,  at  which  time  John 
Smith  has  not  paid  the  final  instalment  on  his  stock,  the 
directors  declare  an  annual  dividend  of  5%  on  the  entire 
outstanding  stock  ($500,000)  as  of  January  i,  payable 
February  15.  The  entries  for  these  transactions  are  as 
follows : 

First  Entry 

January  5,  1917 
Final  Instalment  on  Stock  (or  Instalment  No.  2)  $100,000 

To   Subscriptions $100,000 

As  per  resolution  passed  this  day  by  the 
board  of  directors,  calling  for  the  final 
instalment  of  $100,000  on  $200,000  of 
capital  stock  of  the  Company. 

This  entry  will  close  the  Subscription  account,  substi- 
tuting for  it  the  Final  Instalment  account.  Assuming  that 
all  the  stockholders  have  paid  the  first  instalment  in  full, 
the  First  Instalment  account  is  already  closed. 

Second  Entry 

February  i,  1917 

Cash $99,750 

To  Final  Instalment  on  Stock $99»7SO 

Payment  of  final  instalment  on  capital  stock. 

This,  of  course,  would  be  comprised  in  cash  book  entries 
showing  the  names  of  the  stockholders  and  amount  paid 
by  each.  To  simplify  the  illustration,  it  is  assumed  that  all 
except  John  Smith  had  paid  at  the  time  of  declaring  the 
dividend. 


DIVIDENDS    AND    THEIR    ENTRY    •  i^g 

Third  Entry  _  , 

February  3,  1917 

Surplus   $25,000 

To  Dividend  No.  5 $25,000 

The  board  of  directors  have  this  day  declared 

the  regular  annual  dividend  of  5%  on  the 

capital  stock  of  the  Company,  payable  in 

cash  on  the  15th  day  of  February. 

Fourth  Entry  _,  , 

February  15,  1917 

Dividend  No.  5 $24,975 

To  Cash $24,975 

Dividend  paid  this  day  as  per  resolution  of 

the  board  of  directors,  February  3. 

Fifth  Entry  _,  , 

•^  February  15,  1917 

Dividend  No.  5 $25 

To  Final  Instalment  on  Stock $25 

To  apply  dividend  of  John  Smith  as  part  pay- 
ment of  final  instalment  of  $250  due  on  10 
shares  of  capital  stock  of  the  Company. 

§  130.    Entries  for  Cumulative  Dividends 

Preferred  dividends  for  the  current  year  must  be  paid 
before  dividends  may  be  paid  the  holders  of  common  stock ; 
and  if  the  preferred  stock  is  "cumulative,"  all  dividends  on 
it  which  have  been  "passed"  in  former  years  must  also  be 
paid  in  full  before  the  common  stock  can  participate.  If 
the  provisions  by  which  the  preferred  stock  is  created  do  not 
state  whether  it  is  cumulative  or  non-cumulative,  it  is  treated 
as  cumulative. 

To  illustrate  the  difference  between  the  two  kinds  of 
stock,  suppose  a  company  with  preferred  stock  calling  for 
7%  dividends  has  "passed"  all  dividends  for  two  years,  and 
at  the  end  of  the  third  year  desires  to  pay  a  dividend  on  the 
common  stock.  If  the  preferred  stock  is  cumulative,  it 
will  first  have  to  pay  all  the  "passed"  dividends  on  the  pre- 


I50 


SPECIAL    ENTRIES 


ferred  stock  amounting  to  14%,  and  the  current  dividend 
as  well — 21%  in  all;  while,  if  the  preferred  stock  is  non- 
cumulative,  it  need  only  pay  the  current  dividend  of  7%. 

Although  the  preferred  stock  dividends  must  be  paid 
before  the  common  stock  can  receive  any  share  of  the  profits 
of  the  corporation,  these  dividends  do  not  become  an  obliga- 
tion of  the  company  until  they  are  formally  declared  by  the 
board  of  directors.  It  would  seem,  therefore,  to  be  poor 
accounting  to  enter  them  on  the  books  as  an  obligation  at 
the  time  they  are  "passed,"  although  this  is  sometimes  done. 
It  is  necessary,  however,  that  the  unpaid  cumulative  divi- 
dends be  shown  on  the  balance  sheet,  and  this  is  best  done 
by  means  of  a  footnote  stating  the  contingent  liability  for 
the  dividends  which  have  been  "passed." 

Where  a  preferred  dividend  is  passed  but  it  is  desired 
that  it  be  shown  on  the  books,  it  may  be  done  by  an  entry 
similar  to  the  following: 

Surplus  $30,000 

To  Unpaid  Preferred  Dividend $30,000 

For  1916  preferred  dividend  of  6%  not  de- 
clared by  the  board  of  directors  but  ordered 
to  be  shown  upon  the  books. 

This  might  make  the  Surplus  account  show  a  debit  bal- 
ance, and  in  any  event  it  would  be  reducing  surplus  for 
the  sake  of  a  liability  which  was  only  contingent.  Instead 
of  charging  the  dividend  against  surplus,  it  might  therefore 
be  a  better  plan  to  set  up  the  following  nominal  asset  account 
to  offset  the  contingent  liability  of  the  unpaid  preferred 
dividend : 

Dividends — Preferred  Stock $30,000 

To  Unpaid  Preferred  Dividends $30,000 

For  1916  preferred  dividend  of  6%  not  de- 
clared by  the  board  of  directors  but  ordered 
to  be  shown  upon  the  books. 


DIVIDENDS    AND    THEIR    ENTRY 


151 


§  131.    Entries  for  Stock  Dividends 

Sometimes  the  directors  declare  instead  of  a  cash  divi- 
dend, what  is  known  as  a  "stock  dividend."  There  may  be 
stock  in  the  company's  treasury,  donated  or  purchased,  that 
may  properly  be  divided  among  the  stockholders  in  the  form 
of  a  dividend.  Or  unissued  stock  may  be  issued  for  the 
purpose,  or  new  stock  may  even  be  created.  The  directors 
are  perfectly  justified  in  using  such  stock  for  dividends,  pro- 
vided there  are  undivided  profits  of  an  amount  equal  to  the 
face  value  of  the  stock  issued  as  dividends.  To  illustrate 
the  entries,  suppose  that  the  Michigan  Furniture  Company, 
with  an  authorized  capital  stock  of  $1,000,000,  has  had  a 
very  prosperous  year,  its  profits  amounting  to  over  $100,- 
000,  but  the  directors  desire  to  invest  most  of  their  available 
funds  in  additional  shops  and  machinery.  Their  regular 
annual  dividend  is  10%.  Only  one-half  of  the  authorized 
capital  stock  has  been  issued,  so  they  declare  the  regular 
10%  dividend  but  make  it  payable  in  stock  of  the  company. 

First  Entry 

Surplus  $50,000 

To  Dividend  No.  4 $50,000 

A  dividend  of  10%  on  the  $500,000  outstanding 
capital  stock  of  the  Company  has  this  day 
been  declared  by  the  directors,  payable  in 
stock  of  the  Company. 

Second  Entry 

Dividend  No.  4 $50,000 

To  Capital  Stock $50,000 

Stock  issued  to  pay  stock  dividend  of  10%. 

If  the  unissued  stock  is  being  carried  on  the  books  in 
Unissued  or  Unsubscribed  Stock  account,  the  second  entry 
would  be  a  credit  to  that  account.  If  the  dividend  were  paid 
out  of  treasury  stock,  Treasury  Stock  account  would,  of 
course,  be  credited. 


152 


SPECIAL    ENTRIES 


§  132.    Entries  for  Bond  Dividends 

Corporate  bonds  may,  at  the  discretion  of  the  directors, 
take  the  place  of  cash  in  the  payment  of  dividends,  provided 
only  that  they  are  issued  against  actual  profits.  In  other 
words,  if  there  are  profits  from  which  dividends  may  be 
legally  paid,  the  directors  may  pay  them  in  cash,  in  stock, 
in  bonds,  or  in  any  other  available  property  owned  by  the 
corporation.  To  payment  in  bonds,  however,  there  are  two 
practical  objections  which  do  not  exist  in  the  case  of  stock 
dividends:  (i)  bonds  bear  interest  which  becomes  a  fixed 
charge  as  soon  as  it  is  due,  and  (2)  they  are  an  absolute 
obligation  of  the  corporation  which  must  be  paid  at  ma- 
turity. 

It  is  not  unusual  for  short  term  notes  or  debenture  bonds 
to  be  issued  in  payment  of  dividends  where  it  seems  pre- 
ferable to  conserve  the  cash  for  working  purposes;  but 
even  this  is  a  somewhat  extreme  measure  unless  it  be  for 
payment  of  cumulative  dividends. 

Suppose  that  in  the  preceding  example  the  directors, 
with  the  consent  of  the  stockholders,  had  paid  the  dividends 
in  bonds,  the  entries  would  be  as  follows : 


Surplus  $50,000 

To  Dividend  No.  4. $50,000 

A  dividend  of  10%  on  the  capital  stock  of  the 
Company  has  this  day  been  declared  by  the 
directors,  payable  in  the  first  mortgage 
treasury  bonds  of  the  Company. 


Dividend  No.  4 $50,000 

To  First  Mortgage  Treasury  Bonds $50,000 

First  mortgage  4%  treasury  bonds  given  to 
stockholders  in  payment  of  10%  dividend 
on  the  stock  of  the  corporation. 


DIVIDENDS    AND    THEIR    ENTRY  1^3 

§  133.    Bank  Dividends 

Banks  pay  dividends  on  their  stock  with  checks  drawn 
on  themselves  (cashiers'  checks),  and  this  makes  the  book- 
keeping entries  slightly  different  from  those  of  other  com- 
panies.   The  first  entry  is : 

Undivided   Profits $50,000 

To  Dividend  No.  34. $50,000 

For  dividend  of  5%  declared  this  day  by  the 
directors  on  the  capital  stock  of  the  bank. 

The  charges  to  Dividend  account  come  from  the  cash 
book  as  the  dividend  checks  are  presented  for  payment  at  the 
paying  teller's  window  or  through  the  clearing  house.  The 
balance  of  Dividend  account,  therefore,  shows  the  amount 
of  dividend  checks  outstanding,  and  appears  on  the  balance 
sheet  as  "Unpaid  Dividends." 

§  134.    Property  Dividends 

Dividends,  as  already  stated,  may  consist  of  any  kind 
of  corporate  property,  though,  except  in  the  case  of  cor- 
porate securities,  there  are  obvious  difficulties  in  the  way  of 
distribution  which  make  such  dividends  rare.  Thus,  a  com- 
pany whose  profits  were  in  land  might  divide  this  land 
among  its  stockholders  as  a  dividend,  if  it  were  practically 
possible,  and  no  objection  could  be  raised.  The  more  usual 
form  of  property  dividend  is,  however,  that  of  securities 
of  other  corporations  purchased  at  some  previous  time  for 
investment,  or  received  when  the  corporation  sells  rights  of 
some  kind  to  another  corporation,  taking  the  stocks  and 
bonds  of  that  other  corporation  in  payment.  In  19 16  one 
of  the  great  manufacturers  of  war  supplies  paid  a  dividend 
in  Anglo-French  5%  Bonds. 

Property  dividends  are  also  declared  when  a  corporation 
is  liquidated,  all  of  its  property,  perhaps,  having  been  ex- 


154 


SPECIAL    ENTRIES 


changed  for  stock  or  bonds,  or  both,  of  the  purchasing  com- 
pany. In  this  case  the  distribution  is  not,  strictly  speaking, 
a  payment  of  dividends,  but  is  a  distribution  of  assets,  and 
the  ordinary  rule  that  dividends  may  be  declared  only  from 
profits  does  not  apply. 

§  135-    Unearned  Dividends 

Although  the  laws  of  all  of  the  states  forbid  the  payment 
of  dividends  if  such  pa)mient  results  in  the  impairment  of 
capital,  there  are  more  or  less  frequent  evasions  of  this  rule. 
The  fact  that  a  dividend  has  been  paid  out  of  capital  may 
not  be  known  to  anyone  except  the  directors;  in  fact,  the 
directors  themselves  are  sometimes  ignorant  of  such  an 
occurrence,  owing  to  the  fact  that  they  will  not  take  the 
trouble,  or  have  not  sufficient  knowledge  of  accounting,  to 
inform  themselves  of  the  true  condition  of  the  company. 
Yet  they  may  be  held  liable  by  the  courts  for  any  loss  to 
creditors  occasioned  by  the  payment  of  dividends  out  of 
capital. 

Errors  as  to  profits  may  arise  from  many  causes.  The 
books  of  the  company  may  perhaps  show  a  surplus  of  earn- 
ings w^hich  in  reality  does  not  exist,  because  no  provision 
has  been  made  for  bad  debts  or  depreciation;  or  materials 
have  been  included  in  the  inventories  which  have  not  yet 
been  credited  to  Accounts  Payable;  or  materials  have  been 
valued  at  the  selling  price ;  or  orders  for  future  delivery  may 
have  been  booked  as  sales ;  the  book  value  of  real  estate  may 
have  been  written  up ;  assets  with  no  value,  such  as  patents 
and  copyrights  which  have  expired,  may  still  be  carried  upon 
the  books;  judgments  against  the  company  may  have  been 
omitted  from  the  accounts.  These  and  other  errors  may 
have  been  made  which  hide  the  fictitious  character  of  the 
apparent  profits,  so  that  the  payment  of  dividends  under 
such  conditions  results  in  an  impairment  of  capital.    An  ex- 


DIVIDENDS    AND    THEIR    ENTRY 


155 


amination  by  a  competent  auditor,  however,  would  disclose 
any  such  errors  and  prevent  the  declaration  of  illegal 
dividends. 

In  case  dividends  were  declared  which  impaired  the 
capital,  and  the  company  were  forced  into  the  hands  of  a 
receiver  or  into  bankruptcy  before  the  deficit  was  made  up, 
the  directors  would  be  personally  liable  for  the  amount  of 
the  illegal  dividends. 

In  case  accounting  errors  are  discovered  which  have 
resulted  in  a  fictitious  surplus,  the  proper  charges  must  be 
made  to  show  the  true  condition.  This  may,  if  dividends 
have  been  declared  or  other  expenditures  have  been  made 
on  the  strength  of  the  supposed  surplus,  result  in  a  debit 
balance  in  Surplus  account.  It  is  perfectly  proper  to  allow 
this  debit  balance  to  remain  on  the  ledger  until  wiped  out 
by  the  accumulating  profits,  but  in  the  balance  sheet  it  should 
be  placed  on  the  asset  side  and  called  "Deficit" ;  yet  in 
financial  statements  it  is  not  unusual  to  see  it  deducted  from 
the  capital  stock- 


CHAPTER    XI 

PROPRIETORSHIP    INCORPORATED 
(NEW    YORK) 

§  136.    Organization  Procedure 

The  organization  details  outlined  in  Chapters  XI  to 
XIII  are  in  accordance  with  the  laws  of  the  states  in 
which  the  corporations  discussed  are  respectively  incor- 
porated. Of  course,  an  attorney  will  be  retained  when  an 
incorporation  is  to  be  made,  and  on  him  rests  the  direct 
responsibility  for  the  technical  details;  but  the  accountant 
should  have  at  least  a  general  knowledge  of  the  required 
procedure. 

In  New  York  the  procedure  in  organizing  a  corporation 
is  that  which  obtains  in  a  majority  of  the  states  of  the  Union, 
and  for  this  reason  the  present  chapter  discusses  the  forma- 
tion of  a  New  York  corporation  in  detail. 

§  137.    General  Provisions 

A  New  York  corporation  need  not  limit  itself  to  one 
object  as  in  Pennsylvania  and  some  other  states,  but  may 
be  formed  to  carry  on  as  many  different  kinds  of  ordinary 
business  as  are  set  forth  in  the  certificate  of  incorporation. 
The  application  for  charter — ^which  becomes  the  certificate 
of  incorporation  when  allowed  and  filed  by  the  Secretary  of 
State — must  be  signed  by  three  or  more  incorporators,  who 
must  be  natural  persons  of  full  age,  at  least  two-thirds  of 
them  citizens  of  the  United  States,  and  at  least  one  a  resident 
of  the  State  of  New  York.  Each  incorporator  must  subscribe 
for  one  or  more  shares  of  stock. 

156 


PROPRIETORSHIP    INCORPORATED 


157 


An  organization  tax  of  1/20  of  1%  of  the  total 
authorized  capital  stock  must  be  paid  to  the  State  Treasurer. 
The  Secretary  of  State's  fee  for  filing  the  certificate  of  in- 
corporation is  $10,  and  for  recording,  15  cents  per  folio  of 
100  words.  The  fee  of  the  county  clerk  for  filing  the 
certificate  is  6  cents,  and  for  recording,  10  cents  per  folio. 

There  are  frequently,  of  course,  other  expenses  incident 
to  incorporation,  which  must  be  assumed  by  the  incorpora- 
tors or  by  the  attorney  in  charge,  and  for  which  they  bill  the 
corporation  after  its  organization. 

§  138.    Financial  Details  of  the  Incorporation 

Charles  W.  Hampton  has  been  conducting  a  wholesale 
and  retail  mercantile  business  for  the  past  ten  years  in  the 
City  of  New  York.  He  wishes  to  bring  other  parties  into 
the  business,  and  with  this  in  view  has  decided  to  incorporate 
as  of  June  4,  1916,  under  the  name  of  the  "Hampton  Trad- 
ing Corporation,"  with  a  capital  stock  of  $250,000,  con- 
sisting of  2,500  shares  of  the  par  value  of  $100  each.  The 
shares  have  been  subscribed  for  as  follows : 


Name 

Address 

Shares 

Amount 

Charles  W.  Hampton 

New  York  City 

1,250 

$125,000 

Samuel  Johnson 

" 

500 

50,000 

James  J.  Miller 

" 

500 

50,000 

Lincoln  Webster 

Albany,  New  York 

100 

10,000 

Robert  W.  Kester 

« 

100 

10,000 

Hampton  is  to  receive  1,250  shares  of  full-paid  stock  in 
exchange  for  his  business,  buildings,  stock,  and  equipment, 
including  the  various  assets  and  liabilities  as  per  the  accom- 
panying balance  sheet.  The  business  of  Hampton  is  to  be 
taken  over  as  soon  as  possible  after  the  first  meeting  of  the 
directors,  at  which  time  the  other  subscribers  to  the  stock 
of  the  company  will  pay  50%  of  their  subscriptions,  the 
remainder  to  be  paid  August  9,  1916. 


T5« 


SPECIAL    ENTRIES 

Charles  W.  Hampton 
Balance  Sheet,  as  of  June  i,  1916 


Assets 

Liabilities 

Real  Estate: 

Mortgage  on  Warehouse  $25,000.00 

Land,    Store,    and 

Loans  from  Bank 

10,000.00 

Warehouse $80,000.00 

Notes  Payable 

17,750.00 

Store    Equipment 8,500.00 

Accounts   Payable 

22,800.00 

Delivery  Equipment 9,000.00 

Office   Equipment 4,400.00 

Total  Liabilities.... 

$75,550.00 

Merchandise 46,300.00 

Charles  W.  Hampton: 

Accounts  Receivable...     16,400.00 

Capital   Account. . . . 

100,000.00 

Notes   Receivable 9,350.00 

Personal  Account.. 

5,140.00 

Cash   6,740.00 

• 

$180,690.00 

$180,690.00 

Note:  A  good-will  of  $19,860  is  to  be  included  in  the  above  to 
provide  full  payment  for  $125,000  of  stock  in  the  new  company. 

§  139.    Certificate  of  Incorporation 

This  is  usually  executed  in  duplicate,  signed  by  at  least 
three  subscribers  to  the  stock  of  the  proposed  corporation, 
and  then  duly  acknowledged  by  them  before  a  notary.  The 
directors  for  the  first  year  are  named  in  the  certificate,  and, 
if  the  certificate  or  by-laws  so  provide,  directors  need  not 
be  stockholders.  The  certificate  of  incorporation  must 
contain : 

1.  The  name  of  the  proposed  corporation,  which  must 

indicate  that  it  is  a  corporation  and  must  not  con- 
flict with  that  of  any  existing  corporation. 

2.  The  purpose  or  purposes  for  which  it  is  to  be  formed. 

3.  The  amount  and  kind  of  capital  stock. 

4.  The  number  of  shares,  each  of  which  shall  not  be 

less  than  $5  nor  more  than  $100;  and  the  amount 
of  capital,  not  less  than  $500,  with  which  it  will 
begin  business. 


PROPRIETORSHIP    INCORPORATED  ic^g 

5.  The  location  of  the  principal  business  office. 

6.  Its  duration,  which  may  be  perpetual. 

7.  The  number  of  directors  (not  less  than  three). 

8.  The  names  and  post-office  addresses  of  the  directors 

for  the  first  year. 

9.  The  names  and  post-office  addresses  of  the  subscrib- 

ers to  the  certificate,  and  the  number  of  shares 
which  each  agrees  to  take  in  the  corporation. 

The  certificate  should  also  set  forth  if  power  is  desired 
to  hold  the  stock  of  other  corporations ;  if  cumulative  voting 
is  desired ;  if  the  voting  power  of  the  stockholders  shall  be 
limited  in  any  way,  and  that  directors  need  not  be  stock- 
holders, if  this  is  desired.  It  may  also  contain  any  provisions 
for  the  regulation  of  corporate  affairs,  and  any  desired 
limitations  on  the  powers  of  the  directors  and  stockholders 
which  do  not  conflict  with  the  laws. 

The  charter  of  the  Hampton  Trading  Corporation  will 
be  found  in  the  Appendix,  Form  i. 

§  140.    Filing  the  Certificate  of  Incorporation 

One  of  the  duplicate  originals  of  the  charter  is  sent  to 
the  Secretary  of  State  at  Albany  with  a  check  or  money 
order   for  the   amount   of  the  filing  and   recording   fees 

(§  137)- 

At  the  same  time  a  check  or  money  order  for  the  organi- 
zation tax  (§  137)  is  sent  to  the  State  Treasurer  at  Albany, 
The  Secretary  of  State,  if  he  finds  the  certificate  of  incorpor- 
ation to  be  in  proper  shape,  notifies  the  State  Treasurer,  who 
issues  duplicate  receipts  for  the  organization  tax,  one  of 
which  he  delivers  to  the  Secretary  of  State,  forwarding 
the  other  to  the  person  who  paid  the  tax.  The  Secretary  of 
State  then  records  the  certificate  of  incorporation  and  gives 
notice  of  its  filing  to  the  person  from  whom  it  was  received. 


l6o  SPECIAL    ENTRIES 

The  other  duplicate  original  certificate  of  incorporation, 
signed  and  acknowledged  as  was  the  original,  must  be  filed 
in  the  ofiice  of  the  clerk  of  the  county  in  which  the  principal 
office  is  located.  To  this  must  be  attached  the  duplicate 
receipt  for  organization  tax  received  from  the  State  Treas- 
urer, and  the  certificate  must  be  accompanied  by  the  proper 
fees. 

The  formal  incorporation  of  the  company  is  now  com- 
pleted. Frequently  an  extra  copy  of  the  original  certificate 
of  incorporation  is  forwarded  to  the  Secretary  of  State  at 
the  same  time  the  original  is  sent,  with  the  request  that  he 
certify  and  return  it.  The  fees  for  such  certification  are  15 
cents  for  each  100  words,  and  $1  for  affixing  the  seal.  This 
gives  a  certified  copy  which  is  legal  evidence  of  the  due 
incorporation  of  the  company. 

§  141.    First  Meeting  of  Stockholders 

There  is  no  statutory  or  other  requirement  that  a  meet- 
ing of  the  stockholders  be  held  as  a  part  of  the  organization 
procedure,  as  the  directors  for  the  first  year  are  named  in 
the  charter  and  these  directors  have,  in  all  ordinary  cases, 
full  power  to  do  everything  necessary  to  organize  the  com- 
pany. It  is,  however,  customary  for  the  incorporators — 
who  are  the  subscribers  to  the  stock  of  the  corporation  men- 
tioned in  the  certificate  of  incorporation,  and  who  become 
the  legal  stockholders  of  the  corporation  as  soon  as  the 
charter  is  granted — to  meet  when  the  certificate  has  been 
filed  in  the  county  clerk's  office.  At  this  meeting  by-laws 
are  adopted,  and  resolutions  are  passed  authorizing  the  issue 
of  stock  for  cash  or  for  property,  or  both.  When  property 
is  to  be  taken  over  in  payment  for  stock,  a  stockholders' 
resolution  authorizing  the  exchange  and  the  acceptance  of 
the  property  by  the  directors,  though  not  essential,  is 
desirable. 


PROPRIETORSHIP    INCORPORATED  i6l 

§  142.    Minutes  of  First  Meeting  of  Stockholders ;  By-Laws 

The  first  meeting  of  stockholders  is,  as  intimated, 
ordinarily  a  mere  formal  affair,  at  which  by-laws  already 
prepared  are  adopted  and  such  other  action  is  taken  as  may 
have  been  previously  agreed  upon.  The  first  meeting  of 
stockholders  is  usually  assembled  by  means  of  a  written 
"Call  and  Waiver  of  Notice."  The  minutes  of  the  first 
meeting  of  stockholders  of  the  Hampton  Trading  Corpora- 
tion are  shown  in  Form  4  of  the  Appendix.  Proxy  for 
this  meeting  is  shown  in  Form  5 ;  call  and  waiver  of  notice, 
in  Form  6. 

The  by-laws  shown  in  Form  2  of  the  Appendix,  while 
brief,  are  sufficient  for  the  needs  of  any  corporation  of 
medium  size.  They  meet  the  requirements  of  the  New  York 
statutes,  and  may  be  adapted  to  meet  any  special  require- 
ments of  other  states  or  of  corporations  of  other  purposes. 
For  large  corporations  more  elaborate  forms  of  by-laws  are 
required,  in  which  the  details  of  corporate  procedure  are 
set  forth  much  more  fully.  Such  by-laws  may  be  found  in 
any  of  the  standard  works  on  corporate  organization  and 
procedure.* 

Occasionally  a  certified  copy  of  the  by-laws  is  required, 
or  extracts  from  them  must  be  certified.  In  such  case,  the 
general  form  of  certification  shown  in  Form  3  of  the  Appen- 
dix will  usually  be  found  sufficient. 

§  143.     Minutes  of  First  Meeting  of  Directors;  the  Stock 
Book 

The  first  meeting  of  directors  usually  follows  closely  the 
first  meeting  of  stockholders.  The  minutes  shown  in  Form 
7  of  the  Appendix  cover  in  detail  the  usual  procedure. 

The  procedure  outlined  completes  the  organization  of 
the  company :  the  business  of  Hampton  has  been  taken  over 

•See  Conyngton's  "Corporate  Organization." 


l62  SPECIAL    ENTRIES 

in  payment  for  stock,  the  first  instalment  on  stock  subscrip- 
tions has  been  received,  and  the  various  organization 
expenses  have  been  paid.  It  is  now  necessary  to  complete 
the  official  records  and  make  the  opening  entries  in  the  books 
of  account. 

The  New  York  statutes  require  that  every  stock  cor- 
poration shall  keep  at  its  office  correct  books  of  account  of 
all  its  business  and  transactions,  and  a  book  to  be  known 
as  the  stock  book  (§§  65,  66),  containing  the  names,  alpha- 
betically arranged,  of  all  persons  who  are  stockholders  of 
the  corporation,  their  place  of  residence,  the  number  of 
shares  of  stock  held  by  each,  the  date  of  purchase,  and  the 
amount  paid  thereon.  Also  the  statutes  require  that  this 
stock  book  shall  be  open  daily  during  at  least  three  busi- 
ness hours,  for  the  inspection  of  the  corporation's  stock- 
holders and  judgment  creditors,  who  may  make  extracts 
therefrom.  The  corporation  or  officers  refusing  or  neglect- 
ing to  exhibit  the  books  or  permit  extracts  to  be  taken  there- 
from as  provided  by  the  statutes,  are  liable  to  a  penalty  of 
$50  for  each  day  of  neglect  or  refusal. 

The  proper  stock  book  entries  should  be  made  at  the 
time  the  stock  certificates  are  issued,  and  afterward  at  the 
time  transfers  are  made.  The  form  of  stock  book  to  be 
used  in  New  York  is  prescribed  by  the  Comptroller  and  is 
shown  in  §  66. 

§  144.    Journal  Entries 

The  opening  entries  in  the  books  of  account  should  now 
be  made,  according  to  the  plan  adopted  by  the  accountant. 
A  matter  of  prime  importance  here  is  the  inclusion  of  ade- 
quate and  complete  explanations.  Vague  or  incomplete 
records  should  not  be  tolerated. 

In  the  opening  entries  which  follow,  the  accounts  of  in- 
corporators are  entered  in  the  general  ledger.     This  would 


PROPRIETORSHIP    INCORPORATED 


163 


not  be  advisable  if  the  number  of  incorporators  or  sub- 
scribers to  be  entered  were  large.  Other  opening  entries 
which  accomplish  the  same  end  in  a  somewhat  different 
manner  will  be  found  in  Chapter  VII,  "Stock  of  Original 
Issue." 

The  following  entries  for  stock  subscriptions  and  for 
taking  over  the  assets  and  liabilities  in  payment  are  made 
as  of  June  9,  1916,  the  date  of  organization: 

June  9,  1916 

Charles  W.  Hampton $125,000 

Samuel  Johnson 50,000 

James  J.  Miller 50,000 

Lincoln    Webster 10,000 

Robert  W.  Kester 10,000 

Unissued  Stock 5,ooo 

To  Capital  Stock $250,000 

Hampton  Trading  Corporation,  incorporated 

with   an   authorized   capital   of   $250,000, 

divided  into  2,500  shares   of  $100  each, 

subscribed  for  as  follows : 

Charles  W.  Hampton 1,250  shares 

Samuel  Johnson 500      " 

James  J.  Miller 500       " 

Lincoln  Webster 100      " 

Robert  W.  Kester 100 

Unissued  Stock 50      " 

Subscriptions  payable   50%   in   cash   and 

balance  August  9,  1916. 

At  the  time  of  incorporation,  certain  necessary  expenses 
must  be  advanced  by  the  incorporators  or  by  the  attorney  in 
charge.  These  are  reimbursed  after  organization.  All  cash 
entries  are  given  in  the  cash  book  shown  below.  The  only 
remaining  journal  entry  required  is  that  recording  the  trans- 
fer of  assets  and  liabilities  from  Hampton  to  the  corporation, 
as  follows: 


1 64  SPECIAL    ENTRIES 

Plant  and  Sundry  Assets $200,550 

To  Sundry  Liabilities  and  Subscription..  $200,550 

Assets 

Real  Estate $80,000 

Store   Equipment 8,500 

Delivery  Equipment 9,000 

Office  Equipment 4,400 

Merchandise   46,300 

Accounts  Receivable 16,400 

Notes  Receivable 9,350 

Cash 6,740 

Good-Will   19,860 

Liabilities  and  Subscription 

Mortgages  Payable $25,000 

Bank  Loans 10,000 

Notes  Payable 17.750 

Accounts  Payable 22,800 

Charles  W.  Hampton 125,000 

For  the  entire  assets  and  liabilities  of 
Charles  W.  Hampton,  taken  over  this  day 
in  full  payment  of  his  subscription.  A 
good-will  of  $19,860  is  allowed  over  and 
above  the  net  worth  indicated  by  his 
balance  sheet.  (See  minutes  of  stock- 
holders and  of  directors  for  authority 
and  for  further  details.) 

As  will  be  seen,  the  cash  turned  over  by  Hampton  is 
included  in  the  journal  entry,  in  order  to  show  all  of  the 
assets  and  liabilities  together.  This  plan,  which  obviates  the 
necessity  of  splitting-  entries,  is  to  be  favored,  for  it  sets  forth 
the  entire  transaction.  The  cash  account  is  ticked  in  the 
journal,  and  the  general  ledger  account  in  the  cash  book,  to 
indicate  that  they  are  not  to  be  posted.  If  this  were  not 
done,  the  items  might  be  posted  from  both  books. 


PROPRIETORSHIP    INCORPORATED 

§  145.    Cash  Book  Entries 

Cash  Book 


165 


I9I6 

1916 

June  9 

Samuel     Johnson 

June  9 

Organizing  Expenses  : 

(Paid  on  June 

Organization 

2)   

$500.00 

Tax 

$125.00 

Charles      W. 

Filing     Certifi- 

Hampton (Bal- 

cate   

10.00 

ance      trans- 

Recording  Fees 

20.00 

f erred)    

6,740.00 

Counsel's  Fee., 

250.00 

Samuel  Johnson. 

24,500.00 

Accountant's 

James  J.  Miller.. 

25,000.00 

Fee 

250.00 

Lincoln  Webster. 

5,000.00 

Other  Outlays. 

200.00 

Robert   W.   Kes- 

Balance 

65.885.00 

ter   

S.ooo.oo 

(Payment  of  first 

instalment      of 

50%     on    sub- 

scriptions  to 

stock.) 

^ 

>66,740.oo 

>66,74o.oo 

§  146.    Other  Entries 

The  necessary  entries  have  now  been  made  in  the  journal 
and  cash  book,  and  the  accounts  called  for  by  these  entries 
must  be  opened  in  the  general  ledger.  An  account  should 
also  be  opened  for  unissued  stock.  The  subscribers'  accounts 
will  be  credited  and  cash  debited,  through  the  cash  book, 
when  the  final  payments  are  made  August  9,  19 16. 

There  is  nothing  unusual  in  the  form  of  any  of  these 
ledger  accounts  and  they  are  not  shown  here  in  account  fonn. 

In  the  stock  ledger,  records  of  the  stock  holdings  of  each 
subscriber  must  appear.  Instalment  receipts  must  be  issued 
as  payments  are  received,  and  stock  certificates  made  out 
when  the  final  payments  are  made.  It  is  the  duty  of  both 
the  attorney  and  accountant  to  see  that  the  general  pro- 
cedure is  in  accordance  with  legal  and  business  requirements. 


CHAPTER    XII 

MANUFACTURING   AND    MINING 
CORPORATIONS 

Manufacturing  Corporation 

§  147.    Details  of  Incorporation 

The  preliminary  organization  of  the  Rockwell  Manufac- 
turing Company,  of  Philadelphia,  Pennsylvania,  is  effected 
March  2,  1916.  The  company  is  to  be  incorporated  for  the 
manufacture  and  sale  of  household  furniture,  with  a  capital 
stock  of  $100,000,  consisting  of  1,000  shares  of  the  par 
value  of  $100  each.  The  incorporators  and  the  number  of 
shares  subscribed  for  by  each  are  as  follows : 

Name                                        Address  Shares  Amount 

George  Rockwell  657  Broad  St.,  Philadelphia  400  $40,000 

Jane  Rockwell  657  Broad  St.,  Philadelphia  200  20,000 

Henry  Lindon  1415  Market  St.,  Philadelphia  300  30,000 

Thomas  J.  Peterson  Harrisburg,  Pa.  100  10,000 

The  first  instalment  of  10%,  as  required  by  the  Penn- 
sylvania law,  has  been  paid  in  cash.  Immediately  after  the 
date  of  final  organization,  another  payment  of  50%  will 
be  due,  and  the  balance  will  be  payable  one  month  there- 
after. 

§  148.    Statutory  Records 

After  the  organization  has  been  completed  and  all  re- 
quirements complied  with,  it  is  in  order  to  make  the  neces- 
sary records  in  the  books  of  the  corporation.  In  Pennsyl- 
vania the  statutes  provide  that  either  the  treasurer  or  secre- 

166 


MANUFACTURING  CORPORATION 


167 


tary  shall  keep  at  the  office  of  the  principal  place  of  business 
a  book  containing  the  names  of  all  persons  who  are,  or 
who  within  one  year  shall  have  been,  stockholders  of  such 
company,  showing  the  number  of  shares  held,  when  they 
became  owners  thereof,  the  amount  paid  in,  etc.  This  book 
is  to  be  open  for  inspection  during  business  hours.  It  is 
obvious  that  the  stock  ledger  shown  in  §  66  would  meet  the 
statutory  requirements. 

§  149.    The  Books  of  Account 

Books  of  account  are  not  prescribed  by  statute,  but  a 
complete  set  of  books  should  be  provided,  and  they  must, 
of  course,  be  properly  kept.  The  opening  entries  for  journal 
and  cash  book  are  shown  on  the  following  pages,  including 
payment  of  the  first  and  second  subscription  instalments  and- 
the  customary  expenses  at  the  time  of  incorporation.  Ac- 
counts with  stockholders  must  be  opened  in  the  stock  ledger, 
instalment  receipts  issued,  and  the  stock  certificate  book 
made  ready  for  use  as  soon  as  the  instalments  are  com- 
pleted. 

§  150.    Journal  Entries 

For  opening  entries,  the  plan  that  will  best  suit  the  case 
of  the  particular  corporation  should  be  adopted.  Since  there 
are  only  a  few  subscribers  to  stock,  separate  subscription  and 
instalment  registers  are  not  necessary,  as  their  names  can 
be  entered  in  the  subscription  and  instalment  accounts. 

It  will  be  noted  that  the  first  cash  was  received  March 
2,  1916,  the  date  of  application  for  charter.  Since,  however, 
the  corporation  does  not  come  into  legal  existence  until  the 
charter  is  granted,  it  would  seem  desirable  to  make  the 
opening  entries  on  March  23,  the  actual  date  of  organiza- 
tion. Entries  should  state  all  details  fully,  however,  and 
g^ve  the  dates  of  any  payments  already  made. 


l68  SPECIAL    ENTRIES 

First  Entry 

March  23,  191 6 

Subscriptions $100,000 

To  Capital  Stock $100,000 

Incorporation  of  the  Rockwell  Manufactur- 
ing   Company    with    a    capital    stock    of 

$100,000,  shares  $100.     Subscriptions  as 

below  (under  date  of  March  12,  1916)  on 

terms   of   10%   down,    50%    on   date   of 

organization,    and    the    balance    in    one 

month : 

George  Rockwell 400  shares 

Jane  Rockwell 200      " 

Henry  Lindon 300      " 

Thomas  J.  Peterson 100      " 

The  first  instalment  of  10%  having  been  paid  at  the 
time  of  incorporation,  is  entered  directly  in  the  cash  book, 
as  shown  herewith.  Next,  under  the  same  date,  make  an 
entry  for  the  second  instalment  as  below.  The  first  instal- 
ment might,  of  course,  be  put  through  the  journal  in  like 
manner,  but,  as  it  has  already  been  paid,  the  cash  book  entry 
would  seem  to  be  all  that  is  necessary.  We  might  also  omit 
the  entry  for  Instalment  No.  2  and  let  that  likewise  be 
credited  to  Subscriptions  through  the  cash  book. 

Second  Entry 

March  23,  1916 

Instalment  No.  2 $50,000 

To  Subscriptions $50,000 

For    second    instalment,    being    50%    of    the 
amount  subscribed : 

George  Rockwell $20,000 

Jane  Rockwell 10,000 

Henry   Lindon 15,000 

Thomas  J.  Peterson 5,000 

Also,  if  an  instalment  register    (§   58)    is  used,  the 


MANUFACTURING  CORPORATION 


169 


journal  entries  for  instalments  would  usually  be  omitted, 
and  payments  credited  directly  to  Subscriptions  account 
through  the  cash  book.  When  Instalment  No.  3  becomes 
due  in  one  month,  it  will  be  treated  in  the  same  manner  as 
Instalment  No.  2. 

To  complete  the  accounting  records  it  is  not  necessary 
to  open  accounts  for  the  individual  stockholders  in  the  stock 
ledger,  though  this  might  be  necessary  in  some  states  to 
comply  with  the  statutory  requirements.  A  stock  account 
for  George  Rockwell  follows : 


A/i^//^c^-x£e/ 

au 

t5^  tjx^A/A   (PAilaMfJ.la/ 

CERTIFICATES  CANCELLED     | 

CERTIFICATES   ISSUED            | 

DATE 

JOURNAL 
FOLIO 

CERTIFICATE 
NUMBER 

NO.  or 

5HARE5 

DATE 

JOURNAL 

Faio 

CERTIFICATE 
NUMBER 

NO.  OF 
SHARES 

7m- 

7? 

2 

/ 

doo 

■^ 

LJ 

^ -^ 

••1^^ 

=^ 

~^ 

r- 

■ 

Stock  Ledger  Account 


Stock  certificates  should  not  be  issued  until  the  final 
instalment  is  paid. 


I70 


SPECIAL    ENTRIES 


§  151.    Cash  Book  Entries 

Cash  Book 


Receipts 

Payments 

I9I6 

1916 

Mar.   2 

Subscriptions, 
10%     paid    in 

Mar.  23 

Incorporation 
Expenses : 

by: 

Charter  Fee 

$30.00 

George    Rock- 

Bonus on  Capital 

200.00 

well  

$4,000.00 

Recording  Fees.. 

2.50 

Jane  Rockwell 

2,000.00 

Counsel 

100.00 

Henry  Lindon 

3,000.00 

Accountant  

100.00 

Thomas     J. 

Equipment   

100.00 

Peterson  ... 

1,000.00 

Expenses 

35.00 

!>iar.  23 

Instalment     No. 
2,  50% : 
George    Rock- 
well   

Jane  Rockwell 

Henry  Lindon 

Thomas     J. 

Peterson  ... 

20,000.00 
10,000.00 
15,000.00 

5,000.00 

§  152.    The  Ledger  Accounts 

Capital  Stock 


1916 

Mar.  23    Subscriptions    $100,000.00 


Subscriptions 


I9I6 

1916 

Mar. 23  Capital  Stock: 

Mar.   2  Cash,  10% $10,000.00 

George    Rock- 

Mar. 23  Instalment     No. 

well  $40,000.00 

2,  50% 50,000.00 

Jane  Rockwell  20,000.00 

Henry  Lindon  30,000.00 

Thomas     J. 

Peterson....  10,000.00 

MINING    CORPORATION 
Instalment  No.  2 — 50% 


171 


I9I6 

1916 

Mar.  23  Subscriptions,  50%  : 

Mar. 

23 

Cash   $50,000.00 

George    Rock- 

(Payment    may 

well  $20,000.00 

be     credited 

Jane  Rockwell  10,000.00 

separately  if 

Henry  Lindon  15,000.00 

desired.) 

Thomas     J. 

Peterson —     5,000.00 

$50,000.00 

$50,000.00 

Instalment  No.  3 — 40% 

(Same  form  of  account  as  for  Instalment  No.  2) 

Mining  Corporation 

§  153.    Details  of  Incorporation 

To  illustrate  the  opening  entries  for  a  mining"  company, 
assume  that  the  Copper  County  Mining  Company  is  to  be 
incorporated  under  the  laws  of  Michigan  with  an  authorized 
capital  stock  of  $50,000,  consisting  of  2,000  shares  of  $25 
each.  The  company  is  to  take  over  from  James  R.  Cooke 
and  Frank  Patterson,  a  partially  developed  copper  mine 
located  in  Copper  County,  Michigan,  and  carrying  with  it 
200  acres  of  mineral  land.  The  incorporators  and  the 
amount  of  stock  subscribed  for  by  each  as  of  July  15,  19 16, 
are  as  follows : 


Name 

Address 

Shares 

Amount 

James  R.  Cooke 

Detroit,  Michigan 

900 

$22,500 

Frank  Patterson 

Calumet,        " 

900 

22,500 

John  H.  Jerome 

Detroit, 

100 

2,500 

John  H.  Wilson 

M                          M 

100 

2,500 

1/2 


SPECIAL    ENTRIES 


The  entire  mine  property  is  conveyed  to  the  company  by 
Cooke  and  Patterson  in  full  payment  for  their  subscriptions, 
and  Jerome  pays  cash  in  full  for  his  loo  shares.  Wilson 
pays  $ioo,  but,  failing  to  pay  the  balance,  his  stock  is  de- 
clared forfeited,  Cooke  and  Patterson  each  donate  200 
shares  of  stock  to  the  company,  this  stock  to  be  sold  for  the 
purpose  of  providing  working  capital.  Of  the  donated  stock, 
200  shares  are  sold  at  $15  per  share  and  100  shares  at  $20 
a  share.  All  this  stock  is  paid  for  in  cash.  The  sum  of 
$2,000  has  been  paid  out  for  development  expenses,  and 
$1,000  is  paid  on  account  of  new  buildings  and  construction 
The  various  organization  expenses  have  been  paid  by  the 
incorporators,  who  are  reimbursed  after  incorporation. 

§  154.    Opening  Entries 

The  books  of  account  must  contain  a  complete  record  of 
the  business  operations  of  the  company.  The  official  books 
and  records  to  be  kept  by  the  secretary  must  be  obtained 
and  duly  entered  up.  Opening  entries  for  the  corporation 
are  made,  under  a  slightly  different  plan  from  the  preceding 
illustrations,  as  on  July  15,  1916,  the  date  of  organization: 

July  15,  1916 

Unissued  Stock $50,000 

To  Capital  Stock  Authorized $50,000 

The  Copper  County  Mining  Company  has  this 
day  been  incorporated  with  a  capital  stock 
of  $50,000,  par  value  of  shares  $25  each.. 
(See  minute  book,  page  4.) 


James  R.  Cooke $22,500 

Frank  Patterson • 22,500 

John  H.  Jerome 2,500 

John  H.  Wilson 2,500 

To  Unissued  Stock $50,000 

Subscriptions  have  been  received  as  follows : 


MINING    CORPORATION  1 73 

James  R.  Cooke 900  shares 

Frank   Patterson 900      " 

John  H.  Jerome 100      " 

John  H.  Wilson 100      " 

Cash $2,600 

To  John  H.  Jerome $2,500 

"    John  H.  Wilson 100 

For  full  payment  of  Jerome's  subscription  to 
100  shares  of  stock,  as  per  agreement ;  pay- 
ment of  $100  on  Wilson's  stock,  balance  to 
be  paid  in  10  days. 


Copper  County  Mine  (or  Mine  Property,  or  Real 

Estate)    $45,000 

To  James  R.  Cooke $22,500 

"    Frank  Patterson 22,500 

The  Copper  County  Mine  property  and  all 
improvements  have  this  day  been  conveyed 
to  the  Company  by  Cooke  and  Patterson 
in  full  payment  for  their  subscriptions  to 
stock  of  the  Company,  1,800  shares.  By 
order  of  the  directors.  (See  minute  book, 
page  5.) 


Capital   Stock  Authorized $47,500 

To  Capital  Stock $47,500 

To  transfer  to  Capital  Stock  account  the 
amount  of  paid-up  capital  stock. 

Organization   Expenses $325 

To  Cash $325 

To  cover  various  incorporating  fees  and  ex- 
penses advanced  by  incorporators,  $35; 
charges  of  attorney,  $150;  charges  of  ac- 
countant, $75 ;  other  preliminary  expenses, 
$65. 

§  155.    Entries  for  Donated  Stock 

When  the  stock  is  donated  to  the  treasury  of  the  Com- 


174 


SPECIAL    ENTRIES 


pany,  an  entry  is  required  debiting  Treasury  Stock  and 
crediting  "Working  Capital  Donated"  or  "Donation"  ac- 
count, as  follows : 

Treasury  Stock $10,000 

To  Working  Capital  Donated $10,000 

For  400  shares  of  the  Company's  stock  donated 
by  James  R.  Cooke  and  Frank  Patterson, 
200  shares  each,  to  be  sold  to  provide  work- 
ing capital. 

The  donated  stock  is  placed  in  the  hands  of  a. trustee, 
usually  one  of  the  officers,  appointed  either  by  the  donors  or 
by  the  company.  An  account  with  this  trustee  is  opened  in 
the  stock  book  and  credited  with  the  400  shares  donated. 
The  stock  book  accounts  of  the  donors  are,  of  course, 
debited.  The  donated  certificates  are  attached  to  their  re- 
spective stubs  in  the  stock  certificate  book  and  cancelled,  but 
stock  certificates  need  not  be  made  out  in  the  trustee's  favor, 
as  that  necessitates  the  making  of  transfers  each  time  a  sale 
is  made.  As  the  stock  is  sold  certificates  are  made  out 
direct  to  the  purchasers,  but  the  record  of  issue,  both  in  the 
stock  certificate  book  and  in  the  stock  ledger,  will  show  that 
the  stock  has  been  transferred  from  "Trustee"  account.  The 
following  entries — most  of  them  in  the  cash  book — ^are 
necessary : 

Cash $3,000 

To  Treasury  Stock $3,000 

For  the  sale  of  200  shares  of  treasury  stock  at 
$15  per  share  to  the  following  persons: 
(Names  entered  here) 

Cash $2,000 

To  Treasury  Stock $2,000 

For  sale  of  100  shares  of  treasury  stock  at  $20 
per  share  to  the  following  persons : 
(Names  here) 


MINING    CORPORATION  l^e 

Development  Expenses $2,000 

To  Cash $2,000 

Expenditures  for  developing  the  surface  and 
entrance  to  the  mine. 

Mine  Construction  (or  Building  and  Improvements)  $i,ooo 

To  Cash $1,000 

Expenditures  for  construction  purposes  at  the 
mine. 

Working  Capital  Donated $2,500 

To  Treasury  Stock $2,500 

To  adjust  difference  between  book  price  and  sale 
price  of  the  300  shares  of  treasury  stock 
already  sold. 

§  156.    Entries  for  Forfeited  Subscription 

The  subscription  of  John  H.  Wilson  was  not  completed, 
and  after  calling  on  Wilson  for  payment  of  the  amount  still 
due  on  his  stock — $2,400 — without  result,  it  was  declared 
forfeited.    It  is  debited  back  to  Unissued  Stock  as  follows : 

Unissued  Stock $2,500 

To  John  H.  Wilson $2,400 

"    Profit  on  Forfeited  Stock 100 

For  100  shares  of  stock  subscribed  for  by  John  H. 
Wilson,  on  which  but  $100  was  paid  and  the 
stock  was  therefore  declared  forfeited. 

The  entry  to  be  made  for  forfeited  stock  must  obviously 
depend  on  the  manner  of  making  the  opening  entries. 

The  $100  paid  by  Wilson  is  retained  by  the  corporation 
and  is  credited  at  once  to  Profit  on  Forfeited  Stock  or  to 
Profit  and  Loss.  Before  forfeiting  stock  for  unpaid  sub- 
scriptions, the  statutes  of  the  state  should  be  consulted  for 
the  procedure  required.  In  the  absence  of  any  such  pro- 
vision, the  stock  may  be  forfeited  when  the  subscriber,  after 
demand  therefor,  refuses  or  is  unable  to  pay  the  amount  due. 


176  SPECIAL    ENTRIES 

Sometimes  the  forfeited  shares  are  advertised  for  sale  and 
sold  to  the  highest  bidder  who  in  this  case  must  offer  at 
least  $2,400. 

The  foregoing"  entries  are  for  a  mine  with  a  small 
capitalization,  but  the  general  requirements  are  the  same  for 
any  mining  company. 

There  are  still  on  hand  100  shares  of  treasury  stock 
which  may  be  sold  at  an  early  date  or  held  until  it  will  sell 
for  a  higher  rate  or  even  a  premium.  In  case  the  mine 
proves  to  be  successful,  there  should  be  no  difficulty  in  dis- 
posing of  this  stock  at  a  higher  price.  The  profit  realized 
from  the  donation  of  stock  may  be  transferred  from  Work- 
ing Capital  Donated  account  to  Surplus  if  so  desired. 


CHAPTER    XIII 

PARTNERSHIPS    INCORPORATED 

The  entries  of  the  present  chapter  are  those  required 
for  the  amalgamation  and  incorporation  of  two  Chicago 
partnerships  which  for  a  number  of  years  have  been  success- 
fully conducting  a  manufacturing  business.  The  entire 
business — ^plant,  good-will,  assets,  and  liabilities — of  each 
concern  is  to  be  transferred  to  the  new  company  in  exchange 
for  capital  stock.  Preliminary  to  this  it  is  necessary  to 
discuss  briefly  the  general  nature  and  treatment  of  good- 
will. 

§  157.    Good- Will 

"Good-will  is  the  monetary  value  placed  upon  the  con- 
nection and  reputation  of  a  mercantile  or  manufacturing 
concern,  and  discounts  the  value  of  the  turnover  of  a  busi- 
ness in  consequence  of  the  probabilities  of  the  old  customers 
continuing."*  An  eminent  English  juristf  defines  good- 
will as  "every  advantage  .  .  .  that  has  been  acquired  by 
the  old  firm  in  carrying  on  its  business,  whether  connected 
with  the  premises  in  which  the  business  was  previously  car- 
ried on,  or  with  the  name  of  the  late  firm,  or  with  any 
matter  carrying  with  it  the  benefit  of  the  business." 

Lisle  in  his  "Accounting  in  Theory  and  Practice,"  gives 
as  the  basis  of  the  value  of  good-will,  the  place,  the  name, 
and  the  chance  that  no  one  connected  with  the  old  firm  will 
step  in  to  compete.    There  are  other  elements  which  enter 

'George  Lisle  in  "Accounting  in  Theory  and  Practice." 
fVice-Chancellor,  Sir  W.  Page  Wood. 

177 


178  SPECIAL    ENTRIES 

in,  however ;  such  as  the  personnel  of  the  concern,  its  trade- 
marks, etc.  Although  complex,  good-will  may  be  defined  in 
general  terms  as  the  value  of  any  benefits  a  business  may 
enjoy  or  advantages  it  may  possess,  apart  from  its  actual 
property  or  other  tangible  holdings. 

§  158.    Determination  of  the  Value  of  Good- Will 

As  a  rule,  the  question  of  computing  the  value  of  good- 
will comes  up  only  when  a  business  is  to  be  sold  or  its  pro- 
prietorship transferred.  Then  arises  the  necessity  of  know- 
ing how  much  must  be  paid  for  that  element  in  the  business 
which  is  represented  by  the  increase  in  its  earning  capacity. 
The  business  has  property  of  a  certain  definite  value.  It 
also  has  profit-producing  power  beyond  mere  interest  and 
replacement  returns  on  the  material  value  of  the  capital 
and  property  invested.  This  is  the  good-will ;  and  the  price 
for  which  a  business  is  sold  will,  of  course,  include  this 
good-will,  as  will  also  the  capitalization  if  the  business  is 
incorporated. 

Good-will  is  in  many  cases  the  most  valuable  asset  of  a 
large  business.  The  Royal  Baking  Powder  Company,  when 
amalgamating  with  its  competitors,  is  said  to  have  valued 
the  good-will  carried  by  the  word  "Royal"  at  $12,000,000. 
The  annual  report  of  the  B.  F.  Goodrich  Company  carries 
the  item  of  "good-will"  at  $57,789,000,  while  real  estate, 
plant,  etc.,  are  valued  at  $12,679,151,  and  patents  at  $583,- 
650.  As  the  company  has  outstanding  $60,000,000  common 
stock  and  $30,000,000  preferred,  the  good-will  constitutes 
over  64%  of  the  value  back  of  the  capitalization. 

It  is  customary  to  base  the  value  of  good-will  upon  the 
profits  of  a  concern  for  a  given  number  of  years.  The 
average  profits  for  a  period  of  from  three  to  five  years 
previous  to  the  date  of  valuation  are  taken,  and  from  these 
is  deducted  a  fair  percentage  as  interest  on  the  original  in- 


PARTNERSHIPS  INCORPORATED        j^q 

vestment  of  the  proprietor,  and  a  like  deduction  is  made 
for  his  services.  The  sum  that  remains  is  the  basis  for 
determining  the  good-will.  A  wholesale  or  retail  trading 
concern  may  fix  the  value  of  its  good-will  at  from  one  to 
five  years'  profits;  while  in  a  professional  business  it  is 
estimated  at  from  one  to  two  years'  profits.  The  value  may 
vary  not  only  with  the  nature  of  the  business,  but  also  with 
the  particular  conditions  under  which  it  operates.  In  a 
business  which  has  an  absolute  monopoly  in  one  line,  the 
good-will  may  well  be  considered  as  much  larger  than  in 
the  ordinary  business ;  again,  a  business  which  requires  the 
personal  attention  of  but  one  man  is  worth  more  than  a 
business  of  equal  turnover  which  takes  up  the  entire  atten- 
tion of  two  or  three  men. 

§  159.    Accounting  Treatment  of  Good- Will 

Good-will  is  commonly  regarded  as  a  fixed  asset,  since 
it  represents  a  definite  capacity  for  earning.  This  capacity, 
although  it  may  vary  with  business  conditions,  can  never 
be  said  to  depreciate  in  the  accounting  sense.  Good- Will 
account,  therefore,  unless  written  ofif,  or  increased  with  the 
growth  of  the  business,  remains  the  same,  showing  on  the 
debit  side  the  amount  originally  paid  for  the  good-will. 

Good-Will  account  in  the  case  of  corporations  is  also 
used  at  times  as  a  convenient  place  in  which  to  record  over- 
capitalization or  capitalization  in  excess  of  property  values. 
When  an  incorporating  concern  has  valued  its  actual  prop- 
erty at  a  certain  amount,  its  good-will  is  valued  at  such 
additional  amount  as  will  make  the  total  capitalization  of 
the  company  equal  to  the  estimated  value  of  the  business. 
Good-will,  then,  being  an  elastic  quantity,  may  easily  be 
estimated  at  more  than  it  is  actually  worth.  Whether  esti- 
mated conservatively  or  not,  in  all  such  cases  the  Good-Will 
account  in  the  ledger  shows  the  difference  between  the  face 


l8o  SPECIAL    ENTRIES 

value  of  the  capital  stock  and  the  value  of  the  actual  property 
owned  by  the  corporation. 

There  is  a  tendency  in  modern  business  to  dispense  with 
g-ood-will  altogether,  it  being-  written  off  the  books  grad- 
ually. The  General  Electric  Company  and  the  Victor  Talk- 
ing Machine  Company  have  each  written  their  good-will 
down  to  $i.oo  at  which  amount  it  is  being  carried  on  the 
books.  A  possible  reason  for  this  is  that  the  valuation  of 
good-will  being  based  on  a  given  number  of  years'  purchase 
of  the  profits  of  the  vendor  concern,  less  a  fair  return  on 
capitalization,  its  cost  is  consumed  concurrently  with  the 
efflux  of  the  period  for  which  it  has  been  purchased.  The 
general  practice,  however,  is  to  regard  the  book  value  of 
good-will  as  unchangeable,  simply  representing  the  amount 
paid  for  it  in  the  first  place. 

§  1 60.    Conditions  of  the  Incorporation 

In  Illinois  the  entire  capital  stock  must  be  subscribed  and 
one-half  paid  up  before  the  company  is  permitted  to  begin 
operations,  and  therefore  the  partnership  agreements  to  take 
stock  appear  in  the  application  for  charter.  The  actual 
transfer  of  the  partnership  assets  and  liabilities  to  the  cor- 
poration is  not,  of  course,  made  until  the  latter  is  com- 
pletely organized  and  ready  to  enter  into  contracts.  The 
transfer  acts  practically  as  a  dissolution  of  the  partner- 
ships. 

The  change  of  ownership  incident  to  the  transfer  of  a 
partnership  business  to  a  corporation  does  not  necessarily 
produce  any  change  in  the  business  or  in  the  established 
policy  of  management;  or  even  in  the  manner  of  keeping 
the  books  of  account,  except  such  changes  as  are  necessary 
to  adjust  the  capital  account  to  the  altered  conditions.  Dur- 
ing the  process  of  the  incorporation  now  to  be  considered, 
the  partnerships  go  on  with  their  operations  as  before,  all 


PARTNERSHIPS    INCORPORATED  igi 

of  the  output  after  the  agreed  date  belonging  to  the  corpora- 
tion. 

§  i6i.    Agreement  for  Incorporation 

Certain  preliminary  agreements  have  been  entered  into 
by  the  owners  of  the  two  concerns  now  being  consolidated. 
The  matter  of  good-will,  amount  at  which  to  capitalize,  pro- 
portions of  common  and  preferred  stock,  the  allotment  of 
shares  among  incorporators,  the  selection  of  officers,  etc., 
have  all  been  given  careful  consideration  and  are  embodied 
in  the  preliminary  agreement  for  incorporation  which 
follows : 

Agreement  for  Incorporation 

OF 

Lowell,  Mason  &  Company  and  Oliver  &  Dickson 

This  Agreement  for  Incorporation  made  this  28th  day  of  August, 
1916,  by  and  between  Robert  Lowell,  Walter  F.  Mason,  and  Norman 
Lowell,  copartners  in  the  manufacture  and  sale  of  chemicals  and 
chemical  supplies  in  the  city  of  Chicago,  under  the  firm  name  of 
Lowell,  Mason  &  Company,  and  Nelson  G.  Oliver  and  George  Dickson, 
copartners  in  the  manufacture  of  chemicals,  also  in  the  city  of  Chicago, 
under  the  firm  name  of  Oliver  &  Dickson. 

Witnesseth : 

1.  That  the  business  heretofore  conducted  by  each  of  the  above- 
named  firms  shall  be  amalgamated  and  incorporated  under  the  laws 
of  the  State  of  Illinois  as  the  Lowell-Mason  Chemical  Company. 

2.  That  the  capital  stock  of  said  corporation  shall  be  Five  Million 
Dollars  i. $5,000,000),  consisting  of  Three  Million  Dollars  (.$3,000,000)  of 
common  stock,  being  30,000  shares  of  the  par  value  of  One  Hundred 
Dollars  ($100)  each,  and  Two  Million  Dollars  ($2,000,000)  of  seven 
per  cent  (7%)  cumulative  preferred  stock,  being  20,000  shares  of  the 
par  value  of  One  Hundred  Dollars  ($100)  each.  Three  Million  Dollars 
($3,000,000)  of  the  common  stock,  being  the  entire  issue  thereof,  and 
One  Million  Dollars  ($1,000,000)  of  the  preferred  stock,  is  to  be  issued 
full-paid  in  exchange  for  the  said  Lusinesses  as  gomg  concerns  as  here- 
inafter stated,  including  all  of  their  assets,  credits,  trade-names,  form- 


1 82  SPECIAL    ENTRIES 

ulae,  and  good-will,  and  said  incorporated  company  shall  assume  all 
of  the  outstanding  liabilities  of  the  said  firms  as  existing  at  the  time 
of  transfer,  on  the  date  of  final  organization. 

3.  That  the  stock  of  the  said  corporation  shall  be  issued  full-paid 
as  follows :  To  the  aforesaid  firm  of  Lowell,  Mason  &  Company,  One 
Million,  Five  Hundred  Thousand  Dollars  ($1,500,000)  of  common 
stock  and  Five  Hundred  Thousand  Dollars  ($500,000)  of  preferred 
stock,  distributed  to  the  partners  as  follows: 

Robert  Lowell,      7,500  shares  common  and  2,500  shares  preferred 
Walter  F,  Mason,  6,000       "  "  "    2,000       "  " 

Norman  Lowell,    1,500       "  "  "       500       " 

To  the  aforesaid  firm  of  Oliver  &  Dickson,  One  Million,  Five 
Hundred  Thousand  Dollars  ($1,500,000)  of  common  stock  and  Five 
Hundred  Thousand  Dollars  ($500,000)  of  preferred  stock,  distributed 
to  the  partners  as  follows: 

Nelson  G.  Oliver,  7,500  shares  common  and  2,500  shares  preferred 
George  Dickson,   7,500       "  "  "    2,500       "  " 

The  remaining  stock,  being  One  Million  Dollars  ($1,000,000)  of 
preferred  stock,  is  to  be  underwritten  by  Baker,  Wilson  &  Shaw, 
bankers,  at  95  (5%  commission),  a  contract  to  that  effect  having 
already  been  executed. 

4.  And  it  is  covenanted  and  agreed  that  Two  Hundred  Thousand 
Dollars  ($200,000)  of  common  stock  shall  be  returned  by  the  afore- 
said contracting  parties  to  the  corporation,  One  Hundred  Thousand 
Dollars  ($100,000)  from  each  firm,  to  be  treasury  stock  and  to  be 
given  to  the  said  bankers  free  of  charge  as  a  bonus  with  the  One 
Million  Dollars  ($1,000,000)  of  preferred  stock  subscribed  by  them. 

5.  That  the  Board  of  Directors  shall  consist  of  five  members,  and 
the  first  Board  named  shall  consist  of: 

Robert  Lowell 

Walter  F.  Mason 

Norman  Lowell 

Nelson  G.  Oliver 

George  Dickson 
That    cumulative    voting   shall   be    employed    in   the    election    of 
directors ;   that  directors  shall  be  stockholders ;   and   that   salaries  of 
officers  shall  be  fixed  or  changed  only  by  a  four-fifths'  vote  of  the 
entire  Board. 

6.  The  first  officers  of  the  corporation  shall  be  as  follows : 


PARTNERSHIPS   INCORPORATED 


I&3 


President Robert  Lowell 

.  Vice-President Nelson  G.  Oliver 

Treasurer Walter  F.  Mason 

Secretary George  Dickson 

and  that  the  President  and  Treasurer  shall  each  have  an  annual  salary 
of  Twelve  Thousand  Dollars  ($12,000),  and  that  the  Vice-President 
and  Secretary  shall  each  have  an  annual  salary  of  Eight  Thousand 
Dollars  ($8,000). 

7.  That  after  the  formation  of  said  corporation  the  existing  firms 
of  Lowell,  Mason  &  Company  and  Oliver  &  Dickson  shall  be  formally 
dissolved,  and  the  business  connections  of  each,  and  the  general  public, 
shall  be  formally  notified  thereof. 

In  Witness  Whereof,  the  parties  have  hereunto  affixed  their  hands 
and  seals  on  the  day  and  year  first  above  written. 

Robert  Lowell  [l.s.] 

Walter  F.  Mason  [l.  s.] 

Norman  Lowell  [l.  s.] 

Nelson  G.  Oliver  [l.  s.] 

George  Dickson  [l.s.] 

Attest: 

Charles  W.  Bennett 

§  162.    Allotment  of  Stock 

The  allotment  of  common  and  preferred  stock  is  given 
in  fuller  detail  in  the  following  tabulation : 


Shares 

Name 

Address 

Common 

Preferred 

Amount 

Robert  Lowell 

Chicago 

7,500 

2,500 

$1,000,000 

Walter  F.  Mason 

" 

6,000 

2,000 

800,000 

Norman  Lowell 

(( 

1,500 

500 

200,000 

Nelson  G.  Oliver 

« 

7,500 

2,500 

1,000,000 

George  Dickson 

Evanston 

7,500 

2,500 

1,000,000 

Baker,  Wilson  &  Shaw 

Chicago 
ons 



10,000 

1,000,000 

Total  Subscripti 

. .  30,000 

20,000 

$5,000,000 

§  163.    Underwriting  Expenses 

It  is  customary  for  corporations  in  disposing  of  large 
stock  and  bond  issues,  to  seek  the  aid  of  well-known  bank- 


l84  SPECIAL    ENTRIES 

ing  houses.  When,  this  is  done,  the  bankers  "underwrite," 
or  become  responsible  for,  the  sale  of  a  given  amount  of 
stock.  In  the  present  instance  the  amount  involved  is 
$1,000,000,  the  bankers  agreeing  to  take  this  entire  block 
of  stock  at  95,  or  rather  on  a  5%  commission  basis.  They 
then  sell  the  stock  to  their  customers  at  par  or  above,  the 
difference  between  the  cost  and  selling  prices  representing 
their  profit  or  commission.  It  is  probable  that  in  a  case 
like  this  the  preferred  stock  would  be  sold  at  par  and  the 
$200,000  of  common  stock  be  included  therewith  as  a  bonus, 
the  transaction  bringing  the  bankers  a  profit  of  $50,000 — 
the  amount  of  their  commission. 

To  the  newly  organized  company  the  transaction  is 
legitimate,  since  the  $50,000  realized  by  the  bankers  is  re- 
garded as  a  selling  commission,  exactly  as  if  the  expense 
of  selling  the  stock  had  been  incurred  by  the  company  it- 
self. The  bonus  of  treasury  stock  given  the  bankers  might 
be  entered  on  the  books,  as  shown  later;  or  be  transferred 
directly  from  the  stockholders  to  the  banking  firm,  or  to  the 
new  purchasers,  without  being  entered  on  the  books  at  all. 
As  the  incorporators  have  donated  the  stock  for  the  good  of 
the  cause,  it  matters  little  how  the  transaction  is  handled 
so  long  as  the  desired  end  is  reached,  and  such  receipts  or 
other  evidences  of  it  are  preserved  as  will  establish  the  facts 
should  the  necessity  arise. 

When  stock  is  underwritten  it  is  not  unusual  for  the 
bankers  to  turn  over  to  the  company  full  payment  for  the 
underwritten  stock;  a  check  for  the  difference  between  this 
amount  and  the  underwritten  price  being,  in  turn,  given  to 
them.  Such  amount  is  then  charged  to  Commission  account 
or  to  Underwriting  Expense  or  some  other  suitable  account. 
This  has  the  merit  of  bringing  the  transaction  on  the  books 
in  a  very  clear  and  simple  manner,  and  of  eliminating  from 
record  the  appearance  of  selling  stock  at  a  discount.    In  the 


PARTNERSHIPS  INCORPORATED 


185 


present  cast,  however,  but  50%  of  the  underwritten  stock 
($500,000)  is  paid  by  the  underwriters  at  the  time,  and  a 
check  for  $25,000  (5%  commission  on  50%  of  the  under- 
written stock),  is  given  to  them.  The  remainder  of  the 
underwriters'  subscription  ($500,000)  will  be  paid  later  as 
per  agreement. 


§  164.    Balance  Sheets  of  the  Incorporating  Firms 

The  balance  sheets  of  the  two  partnerships,  Lowell, 
Mason  &  Company  and  Oliver  &  Dickson,  as  of  September 
I,  191 6,  before  the  incorporation,  are  given  below.  These 
statements  and  the  agreement  for  incorporation  as  given 
in  §  161,  form  the  basis  for  opening  the  books  of  the  new 
company. 

Lowell,  Mason  &  Company 
Balance  Sheet,  September  i,  1916 


Assets 

Liabilities 

Land  and  Buildings... 

$250,000.00 

Mortgage   Payable .... 

$100,000.00 

Machinery  and  Tools, 

115,000.00 

Interest    Accrued 

2,500.00 

Patents  and  Patterns.. 

72,800.00 

Notes  Payable 

40,000.00 

Trucks  and  Motors . . . 

25,000.00 

Interest  Accrued 

1,500.00 

Fuel  and  Supplies 

12,400.00 

Accounts  Payable 

25,000.00 

Raw  Material 

52,800.00 
57,300.00 

Accrued  Taxes 

Reserve  Accounts: 

6,500.00 

Work  in  Process 

Finished   Stock 

44,900.00 

For   Depreciation. . . 

12,000.00 

Deferred    Charges    to 

"     Bad  Debts 

2,200.00 

Operating 

9,250.00 

Capital  Accounts : 

• 

Investments  in  Stocks 

Robert  Low- 

and Bonds 

143,700.00 

ell  $500,000 

Walter  F. 

Notes  Receivable 

142,000.00 

Accounts  Receivable.. 

174,800.00 

Mason  ...  400,000 

Cash   

95,000.00 

Norman 

Lowell    ..   100,000 

[,000,000.00 

Profits  Undivided 

$] 

5,250.00 

! 

1,194,950.00 

,194,950.00 

i86 


SPECIAL    ENTRIES 


Oliver  &  Dickson 
Balance  Sheet,  September  i,  1916 


Assets 

Liabilities 

Leasehold   

$156,000.00 

Notes     Payable     (Se- 

Machinery and  Tools. 

85,000.00 

cured)    $126,000.00 

Delivery    Equipment.. 

30,000.00 

Accounts  Payable 136,300.00 

Fuel  and  Supplies 

9,400.00 

Interest  Accrued 1,600.00 

Patents  and  Patterns.. 

122,000.00 

Accrued   Operating 

Raw    Material 

75,100.00 

Charges 10,700.00 

Work  in  Process 

80,900.00 

Capital  Accounts: 

Finished   Stock 

198,000.00 

Nelson    G. 

Deferred  Charges 

12,300.00 

Oliver  ...$500,000 

Bonds  and  Securities. 

150,000.00 

George 

Accounts     Receivable, 

Dickson..   500,000  1,000,000.00 

Net    (book    value 

$223,000) 

221,500.00 

Cash 

134,400.00 

$ 

1,274,600.00 

$1,274,600.00 

§  165.    Statutory  Requirements 

The  Illinois  statutes  state  that,  "It  shall  be  the  duty  of 
the  directors  or  trustees  of  every  stock  corporation  to  cause 
to  be  kept  at  its  principal  office  or  place  of  business  in  this 
state  correct  books  of  account  of  all  its  business,  and  every 
stockholder  in  such  corporation  shall  have  the  right  at  all 
reasonable  times,  by  himself  or  by  his  attorney,  of  examin- 
ing the  records  and  books  of  account  of  the  corporation." 

§  166.    Opening  Entries 

The  opening  entries  for  the  new  corporation  must  be 
such  as  will  record  correctly  and  in  proper  sequence  the 
various  transactions  involved  in  the  incorporation  of  the 
company,  and  in  transferring  to  it,  in  exchange  for  its  capital 
stock,  the  entire  plant,  business,  and  net  assets  of  each  firm. 
Those  shown  below  do  not  differ  materially  from  the  entries 


PARTNERSHIPS  INCORPORATED 


187 


given  in  previous  chapters,  except  in  the  manner  of  making 
charges  for  stock.  Instead  of  opening  accounts  for  the 
various  subscribers  or  even  for  subscriptions,  accounts  are 
opened  separately  for  the  three  different  concerns  which 
have  subscribed  for  stock,  and  the  amount  agreed  upon  is 
charged  to  each. 

September  i,  1916 
First  Entry 

Unissued  Common  Stock $3,000,000 

Unissued  Preferred  Stock 2,000,000 

To  Capital  Stock — Common   $3,000,000 

"    Capital  Stock — Preferred    2,000,000 

The  Lowell-Mason  Chemical  Company  is 
incorporated  this  day  under  the  laws 
of  Illinois,  with  a  capital  stock  of  $5,- 
000,000  divided  into  30,000  shares  of 
common  stock  of  the  par  value  of 
$100  each,  and  20,000  shares  of  7% 
cumulative  preferred  stock  of  the  par 
value  of  $100  each. 

In  the  second  entry,  each  firm  is  charged  with  the 
amount  of  stock  to  be  turned  over  to  its  members,  or  to 
whomsoever  it  directs.  A  separate  entry  and  explanation 
might  be  made,  if  desired,  for  each  firm,  or  even  for  each 
subscriber,  but  in  either  case  each  entry  should  clearly  state 
the  amount  of  common  and  preferred  stock  taken.  The 
entry  for  stock  given  to  the  banking  firm  might  advan- 
tageously be  separated  from  the  others. 

Second  Entry 

Lowell,  Mason  &  Company $2,000,000 

Oliver  &  Dickson 2,000,000 

Baker,  Wilson  &  Shaw 1,000,000 

To  Unissued  Common  Stock $3,000,000 

"   Unissued  Preferred  Stock 2,000,000 


l88  SPECIAL    ENTRIES 

Subscriptions  of  the  above  firms  for  the 
entire  common  and  preferred  stock  of 
the  Company;  the  distribution  of  this 
stock,  as  per  agreement  for  incor- 
poration, the  subscription  list,  and  the 
certificate  of  incorporation,  being  as 
follows : 

Shares 
Com-         Pre- 
Name  mon         ferred 

Robert  Lowell 7,5co  2,500 

Walter  F.  Mason 6,000  2,000 

Norman    Lowell 1,500  500 

Nelson  G.  Oliver....  7,500  2,500 

George   Dickson 7,500  2,500 

Baker,  Wilson  &  Shaw  10,000 

Total 30,000        20,000 


September  i,  19 16 

Third  Entry 

Plant  and  Sundry  Assets $2,000,000 

To  Lowell,  Mason  &  Company $2,000,000 

Purchase  price  of  the  plant,  assets,  and 
business  of  Lowell,  Mason  &  Company 
taken  over  this  day  as  a  going  concern, 
in  full  payment  of  stock  subscriptions 
to  15,000  shares  of  common  and  5,000 
shares  of  preferred  stock  of  the  Com- 
pany, as  per  agreement  for  incorpora- 
tion. (See  minute  book,  page  5.)  All 
right,  title,  and  interest  in  the  assets  of 
Lowell,  Mason  &  Company  are  con- 
veyed to  the  Lowell-Mason  Chemical 
Company,  and  all  liabilities  of  that  firm 
are  assumed  by  the  Lowell-Mason 
Chemical  Company,  as  per  agreement 
for  incorporation. 


PARTNERSHIPS  INCORPORATED 


189 


Fourth  Entry 
Sundries  to  Sundries : 

Land  and  Buildings $250,000 

Machinery  and  Tools 115,000 

Patents  and  Patterns 72,800 

Trucks  and  Motors 25,000 

Fuel  and  Supplies 12,400 

Raw  Material 52,800 

Work  in  Process 57.300 

Finished  Stock 44,900 

Deferred  Charges  to  Operating 9,250 

Investments  in  Stocks  and  Bonds 143,700 

Notes  Receivable 142,000 

Accounts  Receivable 174,800 

Cash 95,000 

Good-Will 1,000,000 

To  Mortgage  Payable 

"    Interest  Accrued 

"    Notes   Payable 

"   Accounts  Payable 

"    Accrued  Taxes 

"    Reserve  for  Depreciation 

"    Reserve  for  Bad  Debts 

"    Surplus 

"    Plant  and  Sundry  Assets 

To  record  in  the  ledger  the  various 
specific  assets  and  liabilities  turned 
over  by  Lowell,  Mason  &  Company. 


$100,000 

4,000 

40,000 

25,000 

6,500 

12,000 

2,200 

5.250 
2,000,000 


Fifth  Entry 

Plant  and  Sundry  Assets $2,000,000 

To  Oliver  &  Dickson 

Purchase  price  of  the  plant,  assets,  and 
business  of  Oliver  &  Dickson,  taken 
over  by  the  Company  as  a  going  con- 
cern, as  per  agreement  for  incorpora- 
tion. (See  minute  book,  page  5.) 
Assets  of  Oliver  &  Dickson  are  taken 
over  and  liabilities  assumed  by  Com- 
pany as  shown  below. 


^2,000,000 


igo  SPECIAL    ENTRIES 

Sixth  Entry 
Sundries  to  Sundries: 

Leasehold $156,000 

Machinery  and  Tools 85,000 

Delivery  Equipment 30,000 

Fuel  and  Supplies 9,400 

Patents  and  Patterns 122,000 

Raw  Material 75,ioo 

Work  in  Process 80,900 

Finished   Stock 198,000 

Deferred  Charges 12,300 

Bonds  and  Securities 150,000 

Accounts  Receivable 223,000 

Cash 134,400 

Good- Will 1,000,000 

To  Notes  Payable  (Secured) 

"    Accounts  Payable 

"    Interest  Accrued 

"    Reserve  for  Bad  Debts 

"    Accrued  Operating  Charges 

"    Plant  and  Sundry  Assets 

To  record  in  the  ledger  accounts  the 
specific  assets  and  liabilities  turned 
over  by  Oliver  &  Dickson,  as  above. 

Seventh  Entry 

Cash $500,000 

To  Baker,  Wilson  &  Shaw 

Payment  of  50%  of  subscription  of  Baker, 
Wilson  &  Shaw,  underwriters,  to  $1,- 
000,000  of  preferred  stock. 

Eighth  Entry 

Organization  Expense $31,000 

To  Cash 

By  order  of  the  directors  for  payment  of 
various  expenses  incurred  during  the 
incorporation  of  the  Company,  includ- 
ing 5%  commission  to  Baker,  Wilson 
&  Shaw  on  $500,000  of  stock  subscrip- 
tion.    (Give  expense  items  in  detail.) 


$126,000 

136,300 

1,600 

1,500 

10,700 

2,000,000 


$500,000 


$3i»ooo 


PARTNERSHIPS    INCORPORATED  igi 


Ninth  Entry 

Treasury   Stock — Common $200,000 

To  Stock  Donation  Account $200,000 

2,000  shares  of  common  stock  donated  to 
the  Company  in  accordance  with  the 
agreement  for  incorporation,  as  fol- 
lows: 

Lowell,  Mason  &  Company  1,000  shares 
Oliver  &  Dickson 1,000     "  ^ 

Tenth  Entry 

Stock  Donation  Account $200,000 

To  Treasury  Stock — Common $200,000 

For  the  bonus  of  2,000  shares  of  common 

stock  transferred  to  Baker,  Wilson  & 

Shaw   as   per   underwriting   contract, 

being  one  share  of  common  stock  for 

every  five  of  preferred  stock  under- 
written.   This  stock  has  been  donated 

by  the  incorporators  and  is  full-paid 

and  non-assessable. 

$500,000  of  the  underwriters'  stock  subscription  still 
remains  to  be  settled  for  as  per  agreement,  at  which  time 
Cash  and  Organization  Expense  will  be  increased  and  the 
account  with  Baker,  Wilson  &  Shaw  closed  out. 

§  167.    Closing  the  Partnership  Books 

The  manner  of  closing  the  partnership  books  will  be 
illustrated  in  detail  by  the  closing  entries  for  Lowell,  Mason 
&  Company.  A  somewhat  different  procedure  is  shown  in 
condensed  form  in  closing  the  books  of  Oliver  &  Dickson. 

It  is  not  unusual,  when  a  partnership  is  incorporated, 
for  the  bookkeeping  system,  if  well-arranged,  to  be  retained 
and  be  used  by  the  new  company,  rather  than  to  open  new 
books.  When  that  is  the  case,  only  such  entries  are  required 
as  are  necessary  to  open  the  accounts  peculiar  to  the  corpora- 


192 


SPECIAL    ENTRIES 


tlon  and  record  the  transactions  incident  to  incorporation. 
However,  in  the  case  now  under  consideration  new  books 
are  presumed  to  have  been  opened,  and,  of  course,  all  asset 
and  liability  accounts  must  necessarily  be  closed  on  the 
partnership  books  and  the  balances  be  transferred  to  the 
corporation's  accounts. 

It  will  be  noticed  that  each  firm  has  been  allowed 
$1,000,000  for  its  good-will  In  addition  to  payment  in  full 
for  Its  net  worth.  The  amount  may  be  too  much,  but  that 
is  a  matter  with  which  the  accountant  is  not  particularly 
concerned  since  this  has  already  been  determined  and  he 
must  accept  conditions  as  he  finds  them.  The  two  firms 
receive  stock  of  the  new  company  In  exchange  for  their 
respective  plants  and  net  assets;  and  this  stock  in  turn  is 
apportioned  to  the  former  partners  in  proportion  to  their 
holdings  as  set  forth  In  the  agreement.  The  successive 
entries  shown  below  exhibit  in  proper  sequence  the  pro- 
cedure and  book  entries  required. 

§   168.     Closing  Entries  on   Books  of  Lowell,   Mason   & 
Company 

The  following  entries  will  properly  adjust  and  close  the 
accounts  of  Lowell,  Mason  &  Company.  The  same  end 
could  be  reached  by  different  series  of  adjusting  entries. 

First  Entry  September  i,  1916 

Good-Will    $1,000,000 

To  Robert  Lowell $500,000 

'     Walter  F.  Mason 400,000 

"    Norman  Lowell 100,000 

To  place  upon  the  books  good-will  of 
$1,000,000  in  accordance  with  agree- 
ment for  incorporation  of  the  Lowell- 
Mason  Chemical  Company  entered  into 
August  28,  1916.  Good-will  appor- 
tioned according  to  the  partners'  hold- 
ings. 


PARTNERSHIPS  INCORPORATED 


193 


Second  Entry 

Lowell-Mason   Chemical   Company $2,194,950 

To  Sundry  Assets : 

Land  and  Buildings $250,000 

Machinery  and  Tools 115,000 

Patents  and  Patterns 72,800 

Trucks  and  Motors 25,000 

Fuel  and  Supplies 12,400 

Raw  Material 52,800 

Work  in  Process 57,30o 

Finished  Stock 44,900 

Deferred  Charges  to  Operating. . .  9,250 

Investments  in  Stocks  and  Bonds.  143,700 

Notes   Receivable 142,000 

Accounts  Receivable 174,800 

Cash 95,000 

Good-Will  1,000,000 

Plant,  good-will,  and  sundry  assets  turned 

over   to   the   Lowell-Mason   Chemical 

Company  in  exchange   for  $2,000,000 

par  value  of  stock  of  that  Company, 

as  per  agreement  for  incorporation. 

Third  Entry 
Sundry  Liabilities: 

Mortgage  Payable $100,000 

Notes  Payable 40,000 

Interest  Accrued 4,000 

Accounts  Payable 25,000 

Accrued  Taxes 6,500 

Reserve  for  Depreciation 12,000 

Reserve  for  Bad  Debts 2,200 

Profits   Undivided 5,250 

To  Lowell-^Iason  Chemical  Company  $194,950 

To  close  accounts  and  transfer  to  Lowell- 
Mason  Chemical  Company  all  of  the 
liabilties  of  this  farm,  as  per  agreement 
for  incorporation. 

All  assets  and  liabilities  have  now  been  closed  off  and 


194 


SPECIAL    ENTRIES 


transferred  to  the  new  corporation;  and  the  only  accounts 
remaining  open  are  the  capital  accounts  of  partners  and  the 
debit  balance  of  the  Lowell-Mason  Chemical  Company.  The 
required  amount  of  stock  has  been  received  from  the  new 
company  to  pay  for  the  $2,000,000  of  net  assets  turned  over. 
This  stock  is  distributed  to  the  former  partners  as  originally 
agreed,  and  entered  on  the  books  as  follows  : 

Stock  of  Lowell-Mason  Chemical  Company  $2,000,000 

To  Lowell-Mason  Chemical  Company  $2,000,000 

For  20,000  shares  of  stock  of  Lowell- 
Mason  Chemical  Company  received  to- 
day in  full  payment  for  net  assets 
shown  in  the  previous  entries.  The 
stock  is  issued  in  the  partners'  names 
as  follows : 

Shares 
Com-   Pre-         Par 
Names  mon  ferred     Value 

Robert  Lowell..  7,500  2,500  $1,000,000 
Walter  F.Mason  6,000  2,000  800,000 
Norman    Lowell  1,500     500       200,000 


Total 15,000  5,000  $2,000,000 


Robert  Lowell $1,000,000 

Walter  F.  Mason 800,000 

Norman  Lowell 200,000 

To  Stock  of  Lowell-Mason  Chemical 

Company $2,000,000 

For  distribution  of  the  above-mentioned 
stock  to  the  partners,  and  to  close  the 
capital  accounts  of  the  firm. 

§  169.    Closing  the  Books  of  Oliver  &  Dickson 

The  entries  below  illustrate  another  plan  of  closing  the 
partnership  accounts.  These  entries  are  condensed  as  much 
as  possible  so  as  to  show  merely  the  procedure  rather  than 


PARTNERSHIPS    INCORPORATED  jge 

the  record  of  details  such  as  was  shown  in  the  previous 
closing  entries. 

Good- Will $1,000,000 

To  Nelson  G.  Oliver $500,000 

George   Dickson 500,000 

(Full  explanation  here.) 

Lowell-Mason  Chemical  Company $2,000,000 

Sundry  Liabilities  (listed  separately) 274,600 

To    Good-Will    and    Sundry    Assets 

(listed  separately) $2,274,600 

(Full  explanation  here  for  transfer  of 
all  assets  and  liabilities.) 

Nelson  G.  Oliver $1,000,000 

George   Dickson 1,000,000 

To  Lowell-Mason  Chemical  Company  $2,000,000 

To  close  capital  accounts  of  the  partners 
upon  distribution  to  them  of  stock  of 
the  Lowell-Mason  Chemical  Company: 

Shares  .  • 

Name  Common  Preferred 

Nelson  G.  Oliver..  7,500  2,500 

George  Dickson. . . .  7,500  2,500 


Total 15,000  5,000 


§  170.    Balance  Sheet  of  New  Company 

The  accompanying  balance  sheet  of  the  new  corporation 
shows  the  combined  assets  and  liabilities  and  capital  stock 
of  the  Lowell-Mason  Chemical  Company.  The  balance  sheet 
of  each  firm  as  given  in  §  164  shows  the  condition  of  the 
two  firms  at  the  time  of  the  incorporation.  Add  $1,000,000 
for  good-will  to  the  net  capital  of  each  firm  to  get  the  value 
placed  upon  its  business.  On  the  books  of  the  new  company 
the  assets  and  liabilities  taken  over  from  the  two  firms  are, 


196 


SPECIAL    ENTRIES 


of  course,  to  be  combined  in  the  respective  accounts,  as 
shown  in  the  consolidated  balance  sheet  herewith. 

Sometimes,  the  names  of  accounts  are  changed  slightly 
to  meet  the  tastes  of  the  accountant  or  bookkeeper;  and  it 
might  be  advisable  to  keep  the  two  sets  of  accounts  with 
customers  of  the  respective  firms  in  separate  ledgers.  The 
good-will  of  $2,000,000  might  have  been  reduced  to  $1,994,- 
750  and  the  surplus  of  $5,250  eliminated.  The  organization 
expenses  are  usually  spread  over  a  term  of  five  or  ten  years 
by  annual  charges  to  Profit  and  Loss. 


Lowell-Mason  Chemical  Company 
Balance  Sheet  as  on  September  i,  1916 


Assets 

Liabilities 

Land  and  Buildings... 

$250,000.00 

Mortgage  Payable . . . 

.  $100,000.00 

Machinery  and  Tools. 

200,000.00 

Notes    Payable 

.     166,000.00 

Patents  and  Patterns.. 

194,800.00 

Accounts   Payable.... 

.     161,300.00 

Leasehold    

156,000.00 

Interest  Accrued 

5,600.00 

Trucks  and  Motors... 

25,000.00 

Accrued   Taxes  and 

Delivery  Equipment... 

30,000.00 

Charges    

17,200,00 

Fuel  and  Supplies 

21,800.00 

Reserve  Accounts: 

Raw  Material 

127,900.00 

For   Depreciation.. 

12,000.00 

Work  in  Process 

138,200.00 

"     Bad  Debts.... 

3,700.00 

Finished    Stock 

Deferred    Charges    to 

242,900.00 

Total   Liabilities  $465,800.00 

Operating 

2i,';=;o.oo 

Investments    

293.700.00 

Capital  Stock: 

Notes   Receivable 

142,000.00 

Common    

.  3,000,000.00 

Accounts    Receivable. . 

397,800.00 

Preferred,  7%  Cum 

- 

Cash     

698,400.00 

ulative 

.  2,000,000.00 

Subscriptions  to  Stock 
Organization  Expenses 

500,000.00 
31,000.00 

Surplus 

5  250.00 

Good-Will    

2,000,000.00 

- 

$5,471,050.00 

$5,471,050.00 

Part  IV — Corporate  Bond  Issues 


CHAPTER    XIV 

THE    CORPORATION    BOND 

§171.    Nature  of  the  Bond 

A  bond  is  a  promise  under  seal  to  pay  a  definite  sum 
of  money  at  a  stated  time,  usually  with  an  agreement  to 
pay  interest  at  certain  periods,  and  a  pledge  of  certain 
properties  as  security  for  payment  of  both  principal  and 
interest.  When  a  corporation  borrows  money,  its  indebted- 
ness may  be  evidenced  either  by  notes  or  bonds.  If  the 
amount  borrowed  is  small,  or  if  it  is  borrowed  in  a  single 
sum,  or  but  from  few  persons,  or  for  a  short  time,  notes 
are  usually  given.  If,  however,  the  amount  is  large  and 
obtained  from  a  number  of  people,  and  borrowed  for  a 
period  of  years,  the  corporate  obligation  is  preferably  and 
usually  evidenced  by  bonds. 

The  difference  between  a  corporate  note  and  a  bond  is 
not  always  clearly  marked.  Both  are  promises  to  pay 
money.  The  phrasing  of  the  bond  is  usually  more  formal 
than  that  of  the  note,  and  it  must  be  executed  under  seal, 
while  the  corporate  note  need  not.  Also  payment  of  bonds 
is  usually,  though  not  invariably,  secured  as  to  both  prin- 
cipal and  interest  by  certain  specified  property  held  for  the 
purpose  under  a  formal  deed  of  trust. 

A  bond  payable  "to  order,"  or  "to  bearer,"  or  "to 
holder,"  is  a  negotiable  instrument,  and  this  in  spite  of  the 

197 


198 


CORPORATE  BOND  ISSUES 


fact  that  it  is  executed  under  seal.  Hence,  if  such  a  bond 
is  in  due  form  and  is  purchased  for  value  and  in  good  faith, 
the  purchaser  is  protected  against  any  defenses  set  up  by 
the  corporation  and  against  any  claims  of  previous  owners. 

A  bond  issue  consists  of  a  number  of  bonds  which,  while 
they  may  vary  as  to  denomination,  are  all  of  like  general 
tenor,  and,  if  secured  at  all,  are  all  secured  and,  unless 
otherwise  expressly  provided,  equally  secured  under  one 
deed  of  trust. 

Bonds  are  issued  in  varying  denominations.  $1,000  is 
the  usual  face  value;  $500  bonds  are  not  infrequently 
issued;  $100  bonds  have  grown  in  favor  in  the  past  few 
years;  and  bonds  are  sometimes  issued  for  popular  sub- 
scription of  still  smaller  face  value.  Bonds  of  a  face  value 
of  $5,000  and  $10,000  are  frequent,  and  they  are  some- 
times issued  in  still  larger  denominations. 

Bonds  are  a  direct  corporate  obligation  and  do  not  in 
any  way  partake  of  the  nature  of  stock.  They  may,  how- 
ever, be  given  rights  of  participation  in  corporate  profits  if 
desired,  and,  in  the  absence  of  statutory  prohibition,  may 
be  given  voting  rights  as  well. 

§  172.    Authorization  of  Bond  Issues 

"The  power  of  a  corporation  to  borrow  money  is  im- 
plied, and  exists  without  being  expressly  granted  by  a 
charter  or  statute."*  In  the  absence  of  restraining  laws, 
a  corporation  may  therefore  issue  corporate  notes  and  bonds 
to  any  desired  amount.  Also,  unless  otherwise  expressly 
provided  by  law,  or  by  charter  or  by-law  provision,  the 
power  to  incur  corporate  indebtedness  lies  with  the  directors, 
and  they  may  at  their  discretion  issue  corporate  notes  and 
bonds  without  authorization  from  the  stockholders.  Public 
utility   corporations   operating   under    the   jurisdiction   of 

*  Cook  on  Corporations,  §  760. 


THE  CORPORATION   BOND  jon 

states  having"  a  public  utility  commission  are  usually  re- 
quired to  secure  the  authorization  of  the  commission  for 
any  contemplated  bond  issues. 

§  173.     Constitutional  and  Statutory  Provisions  Affecting 
Bond  Issues 

Constitutional  provisions  affecting-  the  issue  of  bonds 
are  found  in  many  states,  but  as  a  rule  confine  themselves 
to  the  requirement  that  bonds  shall  be  issued  only  for  value 
and  that  any  fictitious  increase  of  indebtedness  is  void.  In 
a  few  states  the  constitution  requires  the  authorization  of 
bond  issues  by  stockholders. 

Statutory  provisions  requiring  the  assent  of  a  specified 
majority  of  the  stockholders  before  bonds  may  be  issued 
are  also  found  in  many  states.  The  statutory  provisions 
also  frequently  specify  the  notice  which  must  be  given  for 
stockholders'  meetings  to  authorize  bond  issues. 

Statutory  provisions  limiting  the  amount  of  corporate 
indebtedness  are  found  in  many  states,  and  In  some  states 
specific  provisions  exist  as  to  the  selling  price  of  bonds,  as 
in  North  Carolina  where  the  statutes  provide  that  bonds 
may  be  sold  below  par  and  commissions  may  be  paid  upon 
the  sales.  Other  special 'provisions  as  to  bond  issues  are 
found  in  a  number  of  states. 

The,  statutes  of  the  particular  state  should,  of  course, 
always  be  consulted  when  a  bond  issue  is  contemplated. 
Any  proposed  action  may  be  materially  affected  by  the 
provision  of  the  law. 

§  174.    Procedure  in  Issuing  Bonds 

The  various  steps  to  be  taken  in  any  bond  issue  must 
necessarily  depend  upon  the  kind  of  bonds  and  the  con- 
ditions of  the  particular  issue.  The  general  procedure  is 
about  as  follows,  subject  to  any  statutory,  charter,  or  by- 


200  CORPORATE  BOND   ISSUES 

law  provisions  which  may  apply.  It  will  be  understood, 
of  course,  that  any  important  bond  issue  should  be  made 
under  the  direct  supervision  of  competent  attorneys. 

1.  The  directors  pass  a  preliminary  resolution  recom- 
mending the  bond  issue  and  directing  the  call  of  a  special 
meeting  of  stockholders  to  consider  the  recommendation. 
Even  where  the  directors  have  power  to  authorize  a  bond 
issue,  it  seems  preferable  and  prudent  to  obtain  the  approval 
of  the  stockholders. 

2.  A  statement  of  the  proposed  bond  issue  is  then  pre- 
pared and  submitted  for  the  consideration  of  the  stock- 
holders. This  should  give  the  time  to  run,  how  secured, 
terms  of  payment,  rate  of  interest,  redemption  conditions, 
and  all  other  important  details. 

3.  If  the  bond  issue  is  approved  by  the  stockholders, 
their  approval  is  usually  expressed  in  the  form  of  a  resolu- 
tion, though  sometimes  when  a  meeting  is  inadvisable,  the 
issue  is  approved  by  written  consent  of  the  individual 
stockholders. 

4.  The  issue  having  been  sanctioned  by  the  stockhold- 
ers, the  directors  pass  such  resolutions  as  are  necessary  to 
authorize  the  bonds  and  their  issue  in  due  form  by  the 
officers  of  the  corporation. 

5.  If  there  is  a  public  service  commission  in  the  state, 
proposed  bond  issues  of  all  corporations  coming  under  its 
jurisdiction  must  have  its  approval  before  issuance. 

6.  A  trust  company  is  usually  selected  as  the  trustee 
for  the  bonds,  and  a  contract  is  made  for  its  services. 

7.  The  deed  of  trust  conveying  properties  to  the  trustee 
in  trust  for  bondholders,  and  setting  forth  all  the  conditions 
under  which  the  bonds  are  issued,  is  drawn  and  duly 
executed  by  the  proper  officers  of  the  company. 

8.  The  bonds  are  prepared.  These  are  usually  engraved 
on  a  good  bond  paper  with  coupons  attached  if  the  issue 


THE  CORPORATION   BOND  201 

is  of  coupon  bonds.     The  trustee's  certificate  must  appear 
on  each  bond. 

9.  If  realty  is  covered  by  the  deed  of  trust,  a  copy  must 
be  filed  in  every  county  where  the  real  estate  is  located. 

10.  Sale  of  bonds  either  direct  to  the  public,  or  through 
some  firm  of  bankers,  is  provided  for.  This  is  usually  done 
either  before  the  bonds  are  authorized  or  soon  after.  The 
sale  price  usually  depends  on  the  standing  of  the  issuing 
company. 

11.  Provision  must  be  made  for  the  payment  of 
interest  coupons  at  the  issuing  office  or  by  some  bank  or  trust 
company. 

12.  Provision  must  be  made  for  the  redemption  of 
bonds  at  the  date  provided  by  the  trust  agreement. 

§  175.     Preparation  of  Bonds 

Bonds  are  usually  printed  or  engraved  by  a  responsible 
company  and  from  specially  prepared  plates.  Every  pre- 
caution is  taken  to  prevent  the  plates  or  any  impression 
from  them  being  lost  or  stolen,  and  the  engravers  may  even 
be  required  to  give  security  against  loss  resulting  from 
negligence  on  their  part.  The  bonds  are  bound  in  book 
form  and  numbered  consecutively  or  in  series.  When  ready 
for  issue  the  bonds  are  sealed  with  the  corporate  seal, 
attested  by  the  officers  of  the  issuing  company,  and  then 
sent  to  the  trustee,  who  certifies  and  delivers  them  as  pro- 
vided in  the  mortgage.  Before  certification,  each  bond  is 
examined  to  see  whether  it  is  in  proper  form.  If  all  the 
bonds  of  an  issue  are  not  to  be  sold  at  once,  the  entire 
issue  may  be  engraved  and  the  reserved  bonds  held  till 
their  time  for  sale,  or  the  preparation  of  these  latter  may 
be  delayed  until  they  are  needed.  If  they  will  not  be 
used  for  a  number  of  years,  it  is  preferable  to  wait  until 
the  time  of  sale  to  engrave  the  bonds. 


202      -  CORPORATE  BOND  ISSUES 

§  176.    Terms  Used  in  Connection  with  Bonds 

Like  capital  stock,  the  bond  issue  is  usually  authorized 
for  a  stated  amount,  and  the  bonds  are  then  sold  at  such 
times  and  in  such  amounts  as  the  conditions  dictate.  All 
bonds  of  the  same  issue  usually  bear  the  same  date  regard- 
less of  the  date  of  sale,  and  any  coupons  which  have  matured 
before  the  particular  bonds  are  sold,  are  clipped  off,  can- 
celled, and  pasted  in  the  coupon  register. 

The  term  "authorized"  used»  in  connection  with  a  bond 
issue,  has  reference  to  the  aggregate  amount  of  bonds 
sanctioned  or  agreed  upon  by  the  stockholders  and  directors, 
regardless  of  whether  all  these  are,  or  are  not,  disposed  of 
at  one  time.  "Issued"  or  "outstanding"  ^bonds  are  those 
that  have  actually  been  disposed  of  by  the  company  either 
to  the  public  or  to  the  underwriters.  Bonds  are  "nominally 
outstanding"  when  certified  by  the  trustee  and  offered  for 
sale  to  the  public,  or  when  they  are  pledged  as  security  or 
otherwise  placed  in  some  fund  for  the  issuing  company,  no 
actual  sale  having  taken  place.  "Unissued  bonds"  are  those 
that  have  been  authorized  but  not  sold.  "Elscrow  bonds" 
are  those  held  under  option  or  subject  to  some  other  similar 
condition.  "Unsubscribed  bonds"  include  all  bonds  not  yet 
taken  by  the  public;  and  "subscribed  bonds"  those  that  have 
been  sold  or  contracted  for,  though  payment  for  these 
may  not  yet  have  been  fully  made. 

"Treasury  bonds"  (as  the  term  is  ordinarily  used)  ^re  , 
the  unissued  or  unsubscribed  bonds  that  ha^  not  been  dis- 
posed of  by  the  company,  ^^le  entire  amount  of  authorized 
bonds,  or  any  part  thereof,  may  under  this  interpretation 
be  considered  as  "treasury  bonds"  until  disposed  of  by  the 
issuing  company.  Some  accountants,  however,  prpfer  to 
give  the  term  the  same  meaning  as  when  employed  in  con- 
nection with  stock,  designating  as  "treasury  bonds"  only 
such  bonds  of  the  company  as  have  come  back  into  its 


THE  CORPORATION  BOND  203 

possession  by  purchase  or  otherwise,  for  investment  or  for 
sinking  fund  purposes.  Since  the  term  is  confusing,  it 
would  seem  better  not  to  use  it  at  all,  but  instead  to  use 
some  term  which  would  clearly  and  unmistakably  indicate 
the  real  nature  of  the  account  or  classification. 

B9nds  repurchased  by  the  company  should  be  clearly 
indicated  in  the  balance  sheet,  either  as  a  subdivision  of 
"Investments,"  or  as  "Treasury  Bonds,"  with  a  suitablt- 
explanation  of  what  is  me^nt  thereby,  or  under  such  other 
caption  as  will  clearly  indicate  the  nature  of  the  asset  with- 
out possibility  of  misunderstanding.  Bonds  of  the  company 
purchased  by  the  trustees  of  the  sinking  fund,  insurance 
fund,  reserve  fund,  beneficial  fund,  or  by  any  subsidiary  or 
affiliated  organization,  board,  or  society,  should,  however, 
be  listed  in  the  assets  of  such  funds,  and  not  necessarily  as 
treasury  bonds.  Indeed,  it  is  not  uncommon  for  bonds  so 
purchased  to  be  included  among  the  general  investments 
of  the  company;  but  this  should  not  be  done  unless  they  are 
distinctly  earmarked. 

"Cancelled  bonds"  are  those  that  have,  under  the*terms 
of  the  issue,  been  redeemed  by  the  issumg  company  through 
the  sinking  fund  trustee  or  by  direct  purchase  in  the  open 
market:  Securities  or  other  properties  are  said  to  be  in  the 
"treasury"  of  a  company  when  they  are  in  the  custody  of 
the  treasurer,  who  is  the  financial  officer  and  custodian  of 
all  funds  and  securities.  The  "bonded  indebtedness"  of  a 
company  has  reference  to  its  outstanding  bonds.  "Funded 
debt"  is  another  term  for  "bonded  debt"  or  outstanding 
bonds,  being  obligations  of  a  permanent  nature  the  security 
for  which  is  composed  of  pledged  property. 

« 

§  177.^  Issued  and  Outstanding  Bonds 

The  foll6wing  paragraph  taken  from  the  accounting 
classification  of^the  Interstate  Commerce  Commission  indi- 


204  CORPORATE  BOND   ISSUES 

cates  its  designations  of  bonds  before  and  after  the  issue 
thereof : 

"For  the  purposes  of  the  balance  sheet  statement,  funded 
debt  securities  are  considered  to  be  nomincdly  issued  when 
certified  by  trustees  and  placed  with  the  proper  officer  for 
sale  and  delivery,  or  pledged,  or  otherwise  placed  in  some 
special  fund  of  the  accounting-  company.  They  are  con- 
sidered to  be  actually  issued  when  they  have  been  sold  to 
a  bona  fide  purchaser  for  a  valuable  consideration,  and 
such  purchaser  holds  them  free  from  all  control  by  the 
accounting-  company.  All  funded  debt  securities  actually 
issued  and  not  reacquired  and  held  by  or  for  the  accounting 
company  are  considered  to  be  actually  outstanding.  If  re- 
acquired by  or  for  the  accounting-  company  under  such 
circumstances  as  require  them  to  be  considered  as  held  alive 
and  not  cancelled  or  retired,  they  are  considered  to  be 
nominally  outstanding/' 

The  term  "treasury  bond"  is  not  used  in  the  Commis- 
sion's classification.  It  is  understood  by  the  Commission, 
however,  to  cover  either  nominally  issued  or  nominally  out- 
standing bonds  which  are  held  by  the  corporation  in  its 
treasury  upon  its  own  behalf.  It  may  be  said  that  this  is 
the  stand  taken  by  public  utility  commissions  also,  but  the 
accountant  or  corporation  official  may  freely  use  whatever 
caption  for  accounts  he  may  desire,  so  long  as  it  is  one  that 
is  clearly  understood  by  all  concerned  and  the  corporation 
is  not  subject  to  commission  regulations. 

§  178.    Sinking  Funds 

A  sinking  fund  as  applied  to  bond  issues  is  a  fund 
created  for  the  purpose  of  redeeming  the  bonds  when  due, 
or  prior  thereto,  as  may  be  provided  by  the  deed  of  trust. 
Thus,  bonds  may  be  retired  from  time  to  time  as  the  sink- 
ing fund  accumulates,  or  the  fund  may  be  allowed  to  remain 


THE   CORPORATION   BOND  205 

intact  until  the  maturity  of  the  bonds,  when,  if  properly 
constituted  and  maintained,  it  is  sufficient  for  the  retirement 
of  the  entire  issue.* 

§  179.     Sale  of  Bonds 

Unless  prevented  by  statutory  enactment,  bonds  may  be 
sold  at  any  price  that  can  be  obtained.  In  most  of  the 
states  there  are  provisions  that  bonds  may  be  issued  only 
for  value  actually  received,  but,  in  the  absence  of  some 
more  specific  limitations,  bonds  may  still  be  issued  below 
par  if  in  good  faith.  In  some  few  states  more  specific 
provisions  exist. 

The  sale  of  bonds  below  par  by  the  issuing  corporation 
might,  however,  constitute  an  infraction  of  the  laws  against 
usury.  Thus,  if  a  5%  bond  of  the  face  value  of  $1,000  be 
sold  for  $500,  the  rate  of  interest  paid  on  the  money  so 
secured  is  10%.  If,  then,  this  exceeds  the  legal  rate  of 
interest  in  the  state  in  which  the  sale  was  made,  the  trans- 
action is  usurious  and  illegal,  and  for  this  reason  the  original 
purchaser,  or  a  subsequent  purchaser  knowing  the  circum- 
stances, might  be  unable  to  enforce  the  payment  of  his  bond. 
This  condition  could  not,  however,  obtain  if  the  bonds  were 
in  the  hands  of  an  innocent  holder  for  value,  nor  in  states 
in  which  the  statutes  are  silent  as  to  usury,  nor  in  states 
where  bonds  may  by  statute  provision  be  sold  below  par, 
nor  in  states  where  corporations  are  not  allowed  to  avail 
themselves  of  the  defense  of  usury. 

§  180.     Liabilities  of  Vendor 

The  vendor  of  a  bond  does  not  warrant  the  legality  of 
the  issue,  nor  in  any  way  guarantee  payment  of  the  bond. 
All  he  undertakes  is  that  so  far  as  he  has  knowledge,  the 
bond  is  legally  issued  and  what  it  purports  to  be,  that  it 


•See  also  Chapters  XX,  XXI,  "Sinking  Funds." 


2o6  CORPORATE   BOND   ISSUES 

has  come  into  his  hands  in  due  course  and  for  valuable  con- 
sideration, and  that  he  is  legally  competent  to  transfer  it 
to  the  purchaser.  In  this  the  bond  differs  from  a  note, 
draft,  or  check,  which  the  vendor  is  held  to  guarantee  unless 
assigned  "without  recourse." 

§  i8i.     Rights  of  Holders 

A  bond  as  a  negotiable  or  quasi-negotiable  instrument 
is  not  subject  to  the  defenses  that  might  exist  between  the 
original  parties.  In  practice,  "the  courts  go  very  far  in 
protecting  boim  fide  holders  of  corporation  bonds,  and  will 
uphold  and  enforce  such  bonds  under  nearly  all  circum- 
stances. The  defense  that  the  bonds  were  issued  below  par 
does  not  avail  as  against  bona  fide  holders."*. 

A  first  mortgage  bond  does  not  lose  its  priority  though 
issued  after  a  second  mortgage  bond.  Nor  does  the  num- 
ber or  date  of  issue  of  a  bond  in  any  way  affect  its  rights 
of  payment  as  regards  the  other  bonds  of  the  same  issue, 
unless  expressly  so  provided  by  the  bond  or  deed  of  trust. 
Such  provisions  are  legal  but  unusual,  and,  as  a  rule,  every 
bond  of  an  issue  has  all  the  rights  of  any  other  bond  of 
that  issue. 

Bonds  cannot  be  redeemed  by  the  issuing  corporation 
before  they  are  due  save  by  consent  of  the  holders,  unless 
there  is  express  provision  in  the  deed  of  trust  for  such 
prior  redemption.  Nor  can  the  corporation  deposit  with 
the  trustee  sufficient  money  for  the  redemption  of  the  bonds 
and  thereupon  cancel  the  mortgage.  It  may,  of  course, 
deposit  the  money  for  the  payment  of  the  bonds,  but  the 
deed  of  trust  remains  in  force,  and  should  the  deposited 
money  be  lost  before  the  bonds  mature,  the  corporation 
must  again  provide  for  their  payment  if  the  trustee  cannot 
make  good  the  loss.     If,  however,  at  the  maturity  of  the 

•Cook  on  Corporations,  §  766;  see  also  Dickermann  v.  Northern  Trust  Company, 
176  U.  S.   i88  (1900). 


THE   CORPORATION   BOND  207 

bonds,  all  are  not  presented  for  payment,  the  trustee  may- 
reserve  a  sufficient  amount  of  money  for  the  retirement  of 
the  missing  bonds  and  discharge  the  deed  of  trust. 

Coupons  may  be  detached  from  their  bonds  before 
maturity  and  be  sold  separately  if  the  bond  is  negotiable, 
but  otherwise  not.  The  holder  of  a  negotiable  bond  or  a 
negotiable  coupon,  i.e.,  one  payable  to  bearer  or  holder  or 
order,  is  always  presumed  to  be  the  bona  iide  holder  of  such 
bond  or  coupon  until  the  contrary  is  proved,  and,  in  the 
absence  of  any  suspicious  circumstances,  the  corporation 
may  safely  take  up  the  instrument  and  pay  the  amount 
due  thereon  to  the  holder.  Nor,  having  done  so,  could  it 
thereafter  be  held  liable,  even  should  it  be  shown  that  the 
holder  was  not  the  rightful  owner  of  the  bond  or  coupon. 

The  pledgee  of  registered  bonds  may  have  them  trans- 
ferred to  his  own  name  and  may  collect  the  interest  or 
coupons  on  the  pledged  bonds  as  the  same  become  due,  but 
must  apply  all  money  so  received  against  the  debt. 

Suit  may  be  brought  on  a  bond  or  coupon  if  not  paid 
at  maturity,  just  as  suit  may  be  brought  on  a  promissory 
note,  and  this  even  though  the  mortgage  is  not  foreclosed. 
In  case  of  judgment,  however,  no  execution  may  be  had 
against  the  mortgaged  property.  In  some  few  states,  as  in 
New  Jersey,  such  suit  by  the  individual  holders  before  fore- 
closure is  forbidden  by  statute. 

In  case  of  foreclosure^  if  the  property  held  under  the 
deed  of  trust  is  not  sufficient  to  pay  the  bonds  secured 
thereby,  the  bondholders  have  recourse  against  the  corpora- 
tion for  the  balance  due. 


CHAPTER    Xy 

CLASSIFICATION    OF    BONDS 

§  182.     General  Classification 

Bonds  may  be  roughly  classified  as  to  the  nature  of 
their  security,  into  debenture  and  mortgage  bonds,  and  as 
to  form,  into  coupon  and  registered  bonds.  The  distin- 
guishing features  of  these  general  classes  are  given  below. 

§  183.     Debentures 

Bonds  may  either  be  secured  or  unsecured  as  to  re- 
payment. If  unsecured,  the  bonds  are  usually  termed 
"debentures."  This  use  of  the  term  is  not,  however, 
invariable,  as  bonds  of  a  certain  class  secured  by  collateral 
are  at  times  similarly  designated. 

The  usual  unsecured  debenture  bond  is  merely  the  for- 
mal corporate  promise  to  pay  money.  It  is  an  obligation 
of  the  corporation  and  may  be  sued  upon  if  unpaid  at  ma- 
turity, but,  as  it  is  unsecured,  there  can  be  no  foreclosure 
in  case  of  default,  either  as  to  interest  or  principal.  Its 
claim  is  superior  to  that  of  preferred  stock,  but  is  inferior 
to  that  of  any  secured  indebtedness  of  the  corporation.  It 
takes  no  precedence  over  any  other  unsecured  debt,  and 
its  value  therefore  depends  entirely  upon  the  financial 
strength  of  the  issuing  corporation. 

The  term  debenture  bond  is  also  used  to  designate  an- 
other type  of  unsecured  bond  distinguished  by  the  fact 
that  its  interest  is  not  payable  unless  earned.  This  inter- 
est may  be  either  cumulative  or  non-cumulative.  Such  a 
bond  diflfers  from  preferred  stock  only  in  the  fixed  obliga- 

208 


CLASSIFICATION  OF  BONDS  200 

tion  as  to  its  principal;  this  obligation,  however,  becomes 
effective  only  at  the  maturity  of  the  bond,  no  foreclosure 
or  other  action  being  possible  before  that  date. 

As  stated,  secured  bonds  of  a  certain  class  are  some- 
times styled  debentures.  To  secure  payment  of  these 
bonds,  certain  of  the  corporate  assets — usually  stocks  and 
bonds  of  other  corporations — are  deposited  with  a  trustee 
under  a  trust  agreement.  The  bond  is  then  in  effect  a 
collateral  note,  and  is  frequently  called  a  "collateral  trust 
bond"  (§  196). 

§  184.     Mortgage  Bonds 

A  mortgage  bond  is  one  the  payment  of  which  is  se- 
cured by  a  mortgage  of  deed  of  trust  on  part  or  all  of  the 
property  of  the  corporation.  This  deed  of  trust  usually 
authorizes  the  trustees,  in  case  of  default  on  interest  or 
principal  of  the  secured  bonds,  to  take  possession  of  the 
property  and  either  operate  it  or  sell  it,  as  may  be  pro- 
vided, for  the  benefit  of  the  bondholders. 

"Mortgage"  bonds  are  first  mortgage,  second  mort- 
gage, etc.,  according  to  the  lien  of  the  deed  of  trust  by 
which  they  are  secured.  Thus,  a  first  mortgage  bond,  as 
its  name  implies,  is  a  first  lien  on  the  property  covered  by 
the  deed  of  trust — unless  a  builder's  lien,  receiver's  certifi- 
cates, or  similar  obligations  take  precedence — while  a  sec- 
ond mortgage  bond  secured  on  the  same  property  is  a 
second  lien;  i.e.,  in  case  of  foreclosure  the  first  mortgage 
bonds  must  be  paid  in  full,  both  principal  and  interest,  be- 
fore the  holders  of  the  second  mortgage  bonds  receive 
anything.  First  mortgage  bonds  are  therefore  obviously 
more  desirable  than  those  of  a  junior  lien,  that  is,  those 
of  an  inferior  or  later  lien,  unless  the  property  is  of  such 
value  as  to  be  an  absolute  and  unquestionable  security  for 
the  entire  amount  of  outstanding  bonds. 


2IO  CORPORATE   BOND   ISSUES 

§  185.     Coupon  Bonds 

A  coupon  bond  is  one  which  has  attached  to  its  coupons, 
or  orders  for  payment  of  interest,  each  coupon  requiring 
payment  on  its  due  date  of  the  interest  instalment  repre- 
sented by  that  particular  coupon.  Coupons  are  in  effect 
promissory  notes,  each  calling  for  the  payment  of  one  in- 
stalment of  interest  on  the  bond  to  which  it  is  attached. 
The  interest  on  coupon  bonds  is  payable  to  the  holder  of 
its  coupons  and  not  to  the  holder  or  owner  of  the  bond, 
unless  he  is  also  the  owner  or  holder  of  the  coupons. 

Interest  on  bonds  is  usually  payable  semiannually,  and 
each  of  the  coupons  attached  to  a  coupon  bond  calls  for 
the  exact  amount  of  one  of  the  semiannual  interest  pay- 
ments on  that  bond.  Thus,  a  coupon  bond  running  ten 
years  with  interest  payable  semiannually,  has  attached  to 
it  twenty  coupons.  Each  coupon  is  numbered  to  corre- 
spond with  its  bond,  but  also  has  a  serial  number  of  its 
own — running  from  one  to  twenty  in  the  instance  cited — 
indicating  the  order  in  which  the  coupons  come  due.  (See 
§  205  ;  also  Chapter  XVIII.) 

Coupon  bonds  are  usually  made  payable  to  bearer, 
and  the  coupons  of  such  bonds,  regardless  of  whether  the 
bonds  are  registered  or  otherwise,  are  always  payable  to 
bearer  and  pass  by  delivery  when  they  are  clipped  from  the 
bond. 

§  186.     Registered  Bonds 

A  registered  bond  is  one  issued  in  the  name  of  some 
particular  person  in  the  same  manner  as  is  a  certificate  of 
stock,  the  bond  thereafter  being  transferable  only  on  the 
books  of  the  company. 

Coupon  bonds,  as  stated  above,  are  usually  payable  to 
bearer  and  are  then  transferable  by  mere  delivery.  Some- 
times, however,  they  are  issued  in  registered  form  as  to 


CLASSIFICATION   OF  BONDS  211 

principal,  or  with  the  option  of  registry  as  to  principal,  as 
in  the  case  of  the  United  States  Steel  Corporation  bond 
shown  in  §  204;  but  in  any  such  case  the  coupons  are  still 
made  payable  to  bearer.  The  interest  then  is  paid  to  any- 
one who  presents  the  coupon,  but  the  principal — the  bond 
being  registered — will  only  be  paid  to  the  person  in  whose 
name  the  bond  stands  on  the  books  of  the  company,  or 
to  his  assignee. 

Bonds  without  coupons  are  always  registered,  are 
transferable  only  by  assignment,  and  interest  is  payable  to 
the  registered  owner  alone  and  is  usually  paid  by  checks 
sent  out  to  these  registered  owners. 

Coupon  bonds  payable  to  bearer  and  registered  bonds 
are  often  issued  under  the  same  deed  of  trust.  Usually, 
when  this  is  done  the  two  classes  of  bonds  are  made  in- 
terchangeable, i.e.,  any  holder  of  a  coupon  bond  payable 
to  bearer  may  at  any  time  exchange  it  for  a  registered 
bond,  or  the  owner  of  a  registered  bond  may  at  any  time 
exchange  it  for  a  coupon  bond  payable  to  bearer. 

The  advantage  of  an  unregistered  coupon  bond  is 
found  in  the  readiness  with  which  it  may  be  transferred. 
The  advantage  of  a  registered  bond  lies  in  the  difficulty 
of  its  negotiation  in  case  the  bond  is  lost  or  stolen.  If  a 
bond  payable  to  bearer  is  either  lost  or  stolen,  its  sale  or 
disposal  is  comparatively  easy,  since,  once  in  the  hands  of 
an  innocent  holder  for  value,  it  is  valid.  A  registered 
bond,  on  the  contrary,  should  it  be  lost  or  stolen,  is  prac- 
tically non-negotiable.  It  is  payable  only  to  the  party 
named  in  the  bond,  and,  before  it  can  be  successfully  ne- 
gotiated, the  requisite  forgery  of  his  signature  would  ef- 
fectually prevent  a  valid  transfer. 

When  registered  bonds  are  assigned,  the  assignee  sur- 
renders the  old  bond  and  receives  in  exchange  a  bond  is- 
sued in  his  own  name,  the  new  ownership  being  recorded 


212  CORPORATE   BOND   ISSUES 

upon  the  books  of  the  company  at  the  same  time.    A  small 
fee  is  usually  charged  for  the  transfer  or  reissue  of  a  bond. 

§  187.     Kinds  of  Bonds 

Many  kinds  of  bonds  are  issued,  under  varying  desig- 
nations, usually  derived  from  the  more  important  or  dis- 
tinctive features  of  the  particular  issue. 

Bonds  frequently  possess  the  characteristics  of  several 
different  classes.  Thus  the  bonds  of  the  United  States 
Steel  Corporation  shown  in  the  coupon  form  in  the  fol- 
lowing chapter,  known  as  "ten-sixty-year  five  per  cent 
sinking  fund  gold  coupon  bonds,"  were  made  redeemable 
at  any  time  after  ten  years  from  date  of  issue  at  the  option 
of  the  corporation;  their  payment  is  provided  for  by  a 
sinking  fund  and  they  are  payable  in  gold  coin.  Also,  if 
not  previously  redeemed,  they  must  be  paid  at  the  end  of 
sixty  years,  and  they  bear  5%  annual  interest.  All  this  is 
indicated  by  their  title. 

The  bonds  most  frequently  issued  are  briefly  discussed 
in  the  following  sections. 

§  188.     First  Mortgage,  etc.,  Bonds 

A  first  mortgage  bond  is  one  secured  on  property  upon 
which  no  other  bonds  or  similar  obligations  are  secured. 

If  a  number  of  bond  issues  are  secured  by  the  same 
property,  the  first  issue  is,  as  stated  (§  184),  a  first  mort- 
gage bond;  the  next,  a  second  mortgage  bond;  the  next, 
a  third  mortgage  bond,  etc.;  the  lien  of  each  of  these  lat- 
ter being  inferior  to  that  of  the  issue  or  issues  which  pre- 
cede it,  but  superior  to  that  of  the  issue  or  issues  which 
follow. 

§  189.    Junior  Lien,  etc.,  Bonds 

A  junior  lien  bond  is  one  which  comes  after,  or  is  in- 


CLASSIFICATION   OF  BONDS  2n 

ferior  to,  some  other  bond  or  bonds  in  its  lien  upon  the 
property  by  which  it  is  secured.  Thus,  the  lien  of  a  sec- 
ond mortgage  bond  is  a  junior  lien  to  that  of  the  first 
mortgage  bond. 

When  several  different  issues  of  bonds  are  secured  by 
the  same  property,  those  having  the  superior  lien  are  some- 
times styled  "underlying"  bonds,  the  term  indicating  that 
they  are  closer  to  the  property  and  have  a  superior  or 
prior  claim.  Thus,  if  first  and  second  mortgage  bonds  are 
secured  on  the  same  property,  the  first  mortgage  bonds 
are  underlying  bonds.  If  third  mortgage  bonds  are  also 
issued,  both  first  and  second  mortgage  bonds  are  under- 
lying bonds. 

§  190.    Gold,  etc.,  Bonds 

A  bond  may  in  express  terms  provide  for  payment  in 
gold,  silver,  legal  tender  money,  etc.  Such  provisions  are 
legal  and  enforceable.  If  no  medium  is  specified  in  which 
payment  of  a  bond  must  be  made,  legal  tender  is  always 
understood. 

§  191.     Convertible  Bonds 

A  convertible  bond  is  one  which,  under  prescribed 
conditions,  carries  the  right  of  conversion  into  other  se- 
curities of  the  same  corporation.  The  usual  form  of 
convertible  bond  is  that  which  may  be  exchanged  for 
common  or  preferred  stock  of  the  issuing  corporation  at  a 
fixed  rate  of  exchange  and  within  a  certain  period. 

The  American  Telegraph  and  Telephone  Company  is- 
sued on  March  i,  191 3,  $67,000,000  of  twenty-year  con- 
vertible 4^  %  bonds.  These  bonds  were  made  convertible 
at  par  into  common  stock  of  the  company  at  $120  per 
share  (par  value  $100)  from  March  i,  191 5,  to  March  i, 
1925.    It  is  apparent,  therefore,  that  the  price  of  the  bonds 


214 


CORPORATE  BOND  ISSUES 


should  follow  any  advance  in  price  of  the  stock,  while 
their  investment  value  should  prevent  their  following  any 
downward  trend  the  stock  might  take.  The  stock  of  this 
company  on  March  i,  1915,  sold  around  $120  per  share, 
and  the  bonds  at  par,  so  that  an  exchange  on  that  basis 
would  appear  to  be  profitable  when  it  is  considered  that 
the  stock  is  paying  dividends  at  the  rate  of  8%.  By  de- 
positing $600  par  of  bonds  on  which  the  holder  previously 
netted  an  income  of  $27,  he  might  receive  in  exchange 
$500  par  of  stock  with  a  market  value  of  $600,  but  on 
which  the  income  is  $40,  or  6^%  on  the  investment. 
This  is  an  increase  of  $13  in  his  annual  income.  The 
holder  of  a  $100  bond  was  permitted  to  exchange  it  for  one 
share  of  stock  by  paying  the  additional  $20  in  cash;  or  if 
his  holdings  of  bonds  were  larger,  he  was  permitted  to 
take  the  nearest  even  number  of  shares  of  stock  and  re- 
ceive the  difference  in  his  favor,  if  any,  in  cash.  June  15, 
1916,  this  same  stock  sold  around  $130  per  share,  giving 
a  direct  and  substantial  cash  profit  on  the  exchange. 

It  is  obvious  that  the  conversion  privilege  gives  a  bond 
a  speculative  character  which  adds  greatly  to  its  attrac- 
tiveness as  an  investment.  If  the  stock  of  the  issuing  com- 
pany advances  materially,  the  exchange  can  be  made  at  a 
profit.  If  the  stock  does  not  advance,  the  bonds 
themselves  are  still  a  good  investment.  In  short,  the  plan 
combines  the  safety  of  a  bond  investment  with  the  profit 
possibilities  of  an  investment  in  stock.     (See  also  §  272.) 

§  192.    Serial  Bonds 

These  bonds  are  issued  in  series,  one  series  payable  each 
year,  until  the  entire  issue  has  been  redeemed.  If,  for  in- 
stance, the  bonds  cover  ten  years,  the  first  series  will  have 
one  year  to  run;  the  second,  two  years;  the  third,  three 
years;  and  so  on,  until  the  final  series,  which  will  have  ten 


CLASSIFICATION  OF  BONDS  215 

years.  Coupons  are  attached  to  each  series  corresponding" 
with  the  number  of  years  the  bonds  have  to  run.  (See 
also  §  271.) 

Serial  bonds  were  formerly  issued  only  by  municipali- 
ties, or  by  companies  whose  credit  rating  was  not  high, 
but  it  is  usual  now  for  strong  corporations  to  adopt  this 
type,  and  the  fact  that  it  is  selected  dofes  not  mean  that 
the  company  is  financially  unstable.  It  is  believed  by 
many  to  be  the  most  satisfactory  basis  on  which  to  raise 
funds  for  capital  improvements.  In  some  cases  the  serial 
bond  is  insisted  on  by  the  bond  houses  which  are  asked  to 
underwrite  the  issue;  in  others  it  is  demanded  by  the  in- 
vestors; and  not  infrequently  it  is  preferred  by  the  issuing 
company  itself. 

Serial  bonds  might  be  debentures,  but  are  usually  se- 
cured by  a  mortgage  of  the  company's  properties  cover- 
ing the  entire  issue.  When  this  is  the  case  it  is  obvious 
that,  as  one  series  of  the  bonds  is  paid  off  each  year,  the 
security  back  of  the  remaining  series  automatically  in- 
creases, so  that  the  margin  of  security  to  the  investor  is 
constantly  growing  larger.  While  this  may  be  an  advan- 
tage to  the  investor,  it  is  sometimes  disadvantageous  to 
the  issuing  company  which  has  all  the  securing  property 
tied  up  until  the  last  instalment  of  the  bonds  is  paid.  To 
prevent  this,  the  terms  of  the  issue  not  infrequently  pro- 
vide for  the  relinquishment  of  portions  of  the  security  after 
given  redemption  stages  have  been  reached. 

§  193.    Redeemable  Bonds 

Redeemable  bonds  are  issued  with  the  proviso  that  the 
issuing  corporation  may  redeem  or  call  them  before  the 
arrival  of  the  date  of  maturity  fixed  by  the  deed  of  trust, 
either  for  cancellation  or  for  sinking  fund  purposes.  There 
are  many  bond  issues  of  this  nature,  containing  provisions 


2i6  CORPORATE  BOND  ISSUES 

that  the  bonds  may  be  redeemed,  all  or  in  part,  at  a  stated 
price  and  accrued  interest  at  the  option  of  the  company, 
on  any  interest  day  after  a  given  date  on  90  days'  notice, 
notwithstanding  the  fact  that  the  maturity  date  is  far 
removed. 

Frequently,  when  the  redemption  privilege  is  retained 
by  the  issuing  corporation,  it  is  provided  that  a  premium 
shall  be  paid  upon  the  bonds  redeemed  before  maturity, 
which  are  usually  selected  by  lot.  Thus  the  sinking  fund 
provision  of  the  deed  of  trust  securing  the  ten-sixty-year 
5%  sinking  fund  gold  coupon  bonds  of  the  United  States 
Steel  Corporation,  provides  that  at  any  time  after  ten 
years  from  the  date  of  issue,  any  outstanding  bonds  may 
be  redeemed  by  payment  of  the  principal  and  a  premium 
of  10%  of  such  principal  together  with  all  accrued  inter- 
est; bonds  redeemed  to  be  selected  by  lot  and  redemption 
to  be  confined  to  coupon  bonds  until  all  outstanding  cou- 
pon bonds  are  redeemed.     (See  also  §§  260,  261,  267,  268.) 

§  194.    Profit-Sharing,  etc.,  Bonds 

Profit-sharing  bonds,  or  dividend  bonds,  or  partici- 
pating bonds,  as  they  are  variously  termed,  are  bonds 
which  in  addition  to  their  regular  interest  are  entitled  to 
some  participation  in  the  dividends  of  the  company.  The 
dividends  paid  on  a  profit-sharing  bond  may  be  limited 
to  a  fixed  amount  or  percentage,  or  be  conditioned  other- 
wise, or  the  bond  may  participate  as  fully  as  does  the 
common  stock  of  the  company. 

It  is  obvious  that  such  a  provision  gives  the  bond  a 
speculative  character  which  adds  materially  to  its  attrac- 
tiveness as  an  investment.  If  it  participates  fully  on  the 
same  basis  as  does  the  stock  of  the  corporation,  it  has  all 
the  safety  of  a  bond  with  all  the  profit  possibilities  of 
stock,  and  is  preferable  to  a  convertible  bond  because  the 


CLASSIFICATION   OF  BONDS  217 

bond  features  do  not  have  to  be  sacrificed  to  secure  the 
profit-sharing  stock  possibiUties.   • 

§  195.    Income  Bonds 

An  income  bond  is  one  which  relies  upon  the  net  in- 
come of  the  company  for  its  interest  payments.  It  is  a 
lien  on  the  net  income,  but,  unless  profits  are  earned,  its 
interest  is  not  an  obligation  of  the  company.  Such  bonds 
differ  from  preferred  stock  only  in  the  fact  that  their  prin- 
cipal is  an  absolute  obligation  of  the  company  and  must 
be  paid  at  the  maturity  date.  Income  bonds  are  sometimes 
termed  debentures.     (See  §§  183,  232.) 

Income  bonds  may  be  either  cumulative  or  non-cumu- 
lative as  to  interest.  The  principal  may  be  secured  or 
unsecured. 

§  196.    Collateral  Trust  Bonds 

A  collateral  trust  bond  is  one  which  is  secured  by  col- 
lateral— usually  stocks  and  bonds  of  other  corporations 
owned  by  the  issuing  corporation.  These  are  deposited 
with  a  trustee  under  an  agreement  setting  forth  the  con- 
ditions of  the  trust.  Such  a  bond  is  frequently  termed  a 
"debenture."     (See  also  §§  183,  273.) 

§  197.    Guaranteed  Bonds 

A  guaranteed  bond  is  one  the  payment  of  which,  either 
as  to  interest  or  principal,  or  both,  has  been  guaranteed 
by  some  other  corporation.  Such  a  guarantee  must  be 
in  writing  and  must  either  be  written  on  the  instrument 
itself,  or  be  attached  to  it,  to  be  effective. 

Under  proper  conditions  such  guaranteed  bonds  are 
legal  and  are  frequently  issued.  Thus,  the  bonds  of  a  sub- 
sidiary railroad  may  be  guaranteed  by  the  parent  road,  or 
a  bond  of  a  constituent  corporation  may  be  guaranteed 


2i8  CORPORATE   BOND   ISSUES 

by  the  holding  company  or  trust  of  which  it  forms  a  part. 
(See  also  §§  221,  231,  276.) 

§  198.    Consolidated,  etc.,  Bonds 

Consolidated  bonds,  adjustment  bonds,  reorganization 
bonds,  and  refunding  bonds  are  used,  as  their  names  indi- 
cate, in  the  various  consolidations  and  adjustments  com- 
mon in  the  combinations  or  reorganizations  of  railroads 
and  of  the  larger  industrial  corporations. 

Thus,  a  consolidated  bond  will  be  used  to  retire  two 
or  more  smaller  issues,  the  new  bonds  usually  being  se- 
cured upon  the  properties  which  previously  supported  the 
retired  issues. 

Refunding  bonds  are  those  used  to  replace  or  redeem 
bonds  which  are  maturing.  Usually  refunding  bonds 
carry  a  lower  rate  of  interest  than  the  bonds  they  replace, 
although  if  the  money  conditions  are  difficult  at  the  time, 
the  interest  rate  may  be  the  same  or  even  higher.  Re- 
funding bonds  are  sometimes  exchanged  directly  for  the 
old  bonds,  or  otherwise  are  sold  to  provide  money  for  the 
retirement  of  the  maturing  bonds. 

Adjustment  bonds  are  those  used  in  readjustments  or 
consolidations  of  existing  indebtedness.  Reorganization 
bonds,  issued  when  a  corporation  is  in  process  of  reorgani- 
zation, are  usually  employed  to  take  up,  or  as  a  substitute 
for,  other  outstanding  issues.  They  are  generally  the  regu- 
lar first  mortgage  bonds. 

§  199.    Interest  Bonds 

Interest  bonds  are  those  issued  in  payment  of  interest 
due  on  bond  issues  when  cash  is  not  available  for  the  pur- 
pose. They  preserve  the  interest  from  default  and  thereby 
prevent  foreclosure  and  the  other  legal  complications  of 
a  default. 


CLASSIFICATION  OF  BONDS  2I9 

§  200.    Terminal,  etc.,  Bonds 

Terminal  bonds  are  those  issued  by  and  secured  on  the 
property  of  a  terminal  company  which  is,  as  a  rule,  sub- 
sidiary to  the  railroad  or  steamship  line  using  the  terminal. 
Such  bonds  are  usually  issued  for  terminal  purchases  or 
improvements.  Extension  bonds  are  those  issued  by  a 
railroad  to  extend  its  lines.  Equipment  bonds  are  those 
issued  for  equipment,  usually  by  a  railroad  company, 
though  they  might  be  issued  in  connection  with  an  indus- 
trial corporation.  Construction  bonds,  as  their  name  in- 
dicates, are  issued  to  secure  money  for  the  purposes  of 
construction. 

§  201.    Car  Trust  Bonds 

Car  trust  or  equipment  trust  bonds  or  certificates  are 
issued  by  a  trustee  who  holds  for  their  security,  equipment 
purchased  or  leased  by  a  railroad  company.  The  money 
realized  from  the  sale  of  these  bonds  goes  to  the  manu- 
facturers or  vendors  of  the  equipment,  or  the  bonds  may 
be  turned  over  to  them  direct.  The  railroad  company  re- 
ceives its  equipment  subject  to  the  trust  agreement,  and 
retires  the  equipment  bonds  in  such  amounts  and  at  such 
periods  as  are  fixed  by  the  trust  agreement.  The  title  to 
the  equipment  does  not  usually  vest  in  the  railroad  com- 
pany until  all  the  bonds  are  redeemed.  This  Is  a  favorite 
kind  of  bond  for  some  railway  companies  and  is  popular 
with  many  street  railway  companies. 

Bonds  and  notes  of  this  character  are  usually  issued 
in  series,  redeemable  in  their  serial  order  as  payments  are 
made  by  the  railroad  company.  When  the  final  payment 
is  made  by  the  railroad  company,  the  deed  of  trust  by 
which  the  property  is  held  is  released  and  the  equipment 
becomes  the  property  of  the  purchasing  company.  (See 
also  §§  224,  275.) 


220  CORPORATE  BOND  ISSUES 

§  202.    Purchase  Money  Bonds 

Purchase  money  bonds  are  those  given  to  secure  funds 
for  the  purchase  of  the  property  by  which  they  are  secured. 

§  203.    Short  Term  Notes 

A  short  term  note  is  merely  a  corporation's  promissory 
note.  It  may  be  secured  or  unsecured.  If  secured,  it  is 
usually  by  the  deposit  of  collateral  with  a  trustee  under  a 
trust  agreement.  The  larger  issues  generally  have  coupons 
attached  and  differ  but  little  from  the  usual  bond,  except 
in  their  early  maturity. 

Short  term  notes  are  issued  when  the  existing  condi- 
tions are  unfavorable  for  a  long  time  loan,  and  usually 
either  carry  a  larger  rate  of  interest  than  a  bond  issue,  or 
are  sold  at  a  discount  that  produces  the  same  practical 
result.  Short  term  notes  are  usually  floated  with  the  ex- 
pectation that  they  will  either  be  retired  at  maturity  or 
will  be  taken  up  by  a  bond  issue  on  more  favorable  terms 
than  would  have  been  possible  at  the  time  the  notes  were 
issued. 

Short  term  notes  usually  run  from  one  to  five  or  six 
years.  The  security  deposited  with  the  trustee  consists 
of  bonds  and  stocks  of  other  companies,  oh  almost  the 
same  plan  as  collateral  trust  bonds.  These  notes  are 
issued  under  varying  conditions,  and  their  tenor  and 
redemption  features  give  to  them  such  designations  as 
"collateral  lien  notes,"  "collateral  trust  serial  notes," 
"collateral  gold  notes,"  etc.  Any  one  of  these  titles  might 
contain  the  word  "guaranteed"  in  case  that  is  a  feature 
of  the  note.    (See  also  §  223.) 


CHAPTER    XVI 

BOND    FORMS 

§  204.     Form  of  Bond 

The  language  of  a  bond  is  usually  more  formal  than 
that  of  a  note.  It  must  be  executed  under  seal,  and,  if 
secured,  reference  is  made  in  the  bond  itself  to  the  deed 
of  trust  under  which  it  is  issued. 

Usually  a  statement  of  the  general  conditions  of  a  bond 
issue  appears  upon  the  face  of  each  bond,  and  reference  is 
made  to  any  features  of  special  importance,  such  as  the 
existence  of  a  sinking  fund,  the  conditions  of  redemption, 
the  method  of  transfer  and  exchange  when  bonds  payable  to 
bearer  and  registered  bonds  are  issued  under  the  same  deed 
of  trust,  etc.,  etc. 

Following  is  the  form  of  coupon  bond,  with  privilege  of 
registration,  used  by  the  United  States  Steel  Corporation: 

United  States  of  America 
State  of  New  Jersey 

United  States  Steel  Corporation 
Ten-Sixty- Year  Five  Per  Cent  Sinking  Fund  Gold 

Coupon  Bond 
$ No 

United  States  Steel  Corporation,  a  corporation  created  and  exist- 
ing under  the  laws  of  the  State  of  New  Jersey,  and  hereinafter  termed 
the  "Steel  Company,"  for  value  received  promises  to  pay,  on  the  first 
day  of  April,  A.  D.  1963,  at  the  office  or  agency  of  the  Steel  Company 
in  the  City  of  New  York,  to  bearer,  or  if  registered,  to  the  registered 

holder  of  this  bond,  thousand  dollars  in  gold  coin  of  the 

United  States,  of  the  present  standard  of  weight  and  fineness,  and  to 
pay  interest  thereon  from  April  i,  1903,  at  the  rate  of  five  per  cent  per 

221 


222  CORPORATE  BOND  ISSUES 

annum,  such  interest  to  be  payable  at  such  office  or  agency  in  like  gold 
coin  semiannually  on  the  first  day  of  May  and  of  November  in  each  year 
(except  that  the  first  instalment  is  to  be  for  seven  months  and  the  last 
for  five  months  interest),  but  only  upon  presentation  and  surrender  of 
the  respective  coupons  for  such  interest  hereto  attached  as  they  severally 
mature.  All  payments  upon  this  bond,  both  of  principal  and  interest, 
shall  be  made  without  deduction  of  any  tax  or  taxes  which  the  Steel 
Company,  its  successors  or  assigns,  may  be  required  to  pay,  deduct,  or 
retain  therefrom  under  any  present  or  future  law  of  the  United  States, 
or  of  any  State,  County,  or  Municipality  therein. 

This  bond  is  one  of  a  duly  authorized  issue  of  coupon  bonds  and 
registered  bonds  of  the  Steel  Company,  the  aggregate  amount  whereof  is 
limited  so  that  there  shall  never  at  any  one  time  be  outstanding  bonds  of 
said  issue  for  an  aggregate  principal  sum  exceeding  $250,000,000 ;  all  of 
which  bonds  have  been  issued,  or  are  to  be  issued,  under  and  in 
pursuance  of,  and  are  to  be  secured  ratably  by,  and  are  subject  to,  an 
indenture  dated  April  i,  A.  D.  1903,  duly  executed  by  the  Steel  Com- 
pany to  the  United  States  Trust  Company  of  New  York,  as  Trustee, 
covering,  subject  to  the  prior  lien  of  the  indenture  dated  April  i,  1901, 
executed  by  the  Steel  Company  to  the  United  States  Trust  Company  of 
New  York,  all  the  stocks,  bonds,  and  other  property  now  or  at  any  time 
hereafter  subject  to  said  indenture  dated  April  i,  1901,  and  all  the 
stocks,  bonds,  and  other  property  that  by  the  terms  of  said  indenture 
dated  April  i,  A.  D.  1903,  shall  be  subject  to  the  lien  thereof;  and 
hereby  reference  is  made  to  said  indentures  with  the  same  effect  as  if 
herein  fully  set  forth. 

No  recourse  shall  be  had  for  the  payment  of  the  principal  or  interest 
of  this  bond  ag^ainst  any  stockholder,  officer,  or  director  of  the  Steel 
Company,  either  directly  or  through  the  Steel  Company,  by  virtue  of 
any  statute  or  by  enforcement  of  any  assessment  or  otherwise ;  any  and 
all  liability  of  stockholders,  directors,  and  officers  of  the  Steel  Com- 
pany being  hereby  released. 

This  bond  shall  pass  by  delivery  unless  registered  in  the  owner's 
name  on  the  books  of  the  Steel  Company  at  its  office  or  agency  in 
said  City  of  New  York,  such  registry  being  noted  on  the  bond  by  the 
bond  registrar  of  the  Steel  Company,  after  which  no  transfer  shall  be 
valid  unless  made  on  said  books  in  the  manner  prescribed  in  said 
indenture,  and  similarly  noted  on  the  bond ;  but  the  same  may  be  dis- 
charged from  registry  by  being  transferred  in  like  manner  to  bearer, 
after  which  transferability  by  delivery  shall  be  restored;  but  again, 
from  time  to  time,  it  may  be  registered  or  transferred  to  bearer  as 
before.  Such  registration,  however,  shall  not  affect  the  transferability 
of  the  coupons  for  the  interest  hereon,  by  delivery  merely,  and  pay- 
ment to  the  bearer  thereof  shall  discharge  the  Steel  Company  in  respect 


BOND   FORMS  223 

of  the  interest  therein  mentioned  whether  or  not  the  bond  shall  have 
been  registered. 

This  bond,  with  the  coupons  for  all  interest  instalments  which  shall 
not  have  matured,  may  also,  as  provided  in  said  indenture,  be  exchanged 
for  a  registered  bond  without  coupons  for  an  equal  aggregate  principal 
sum. 

Neither  this  bond  nor  any  coupon  for  interest  thereon  shall  be- 
come or  be  valid  until  the  bond  shall  have  been  authenticated  by  the 
certificate  indorsed  hereon  duly  signed  by  the  Trustee  under  said 
indenture. 

This  bond  is  subject  to  redemption  at  the  pleasure  of  the  Steel 
Company  as  provided  in  said  indenture,  on  any  first  day  of  May  or 
any  first  day  of  November,  after  April  i,  1913,  by  payment  of  the 
principal  of  the  bond  and  the  unpaid  accrued  interest,  together  with  a 
premium  of  ten  per  cent  of  such  principal.  The  Steel  Company  annually 
will  pay  the  sum  of  $1,010,000  to  the  Sinking  Fund  Trustees  under  said 
indenture,  which  sum  is  to  be  applied  to  the  redemption  of  bonds  of 
said  issue,  in  the  manner  provided  in  said  indenture. 

No  action  or  proceeding  at  law  or  in  equity  shall  be  instituted  or 
shall  be  maintainable  upon  this  bond  or  upon  any  of  the  coupons 
hereof  for  the  enforcement  or  collection  of  interest  or  for  maturing  the 
principal  thereof  by  reason  of  any  default  in  payment  of  any  instal- 
ment of  interest  hereon,  until  after  such  instalment  thereof  shall  have 
been  unpaid  and  in  default  for  the  continuous  period  of  two  years,  nor 
except  when  and  as  permitted  by  the  terms  of  said  indenture. 

In  Witness  Whereof,  said  United  States  Steel  Corporation  has 
caused  these  presents  to  be  signed  by  a  Vice-President,  and  its  cor- 
porate seal  to  be  hereunto  affixed,  and  to  be  attested  by  its  Secretary 
or  by  an  Assistant  Secretary,  and  coupons  for  such  interest  bearing 
the  engraved  fac-simile  signature  of  its  Treasurer  to  be  attached  hereto, 
the  first  day  of  April,  A.  D.  1903. 

United  States  Steel  Corporation 
[seal]  By 

Vice-President 
Attest: 

Secretary 

This  bond,  as  will  be  noted,  may  be  registered  if  desired 
and  may  again  be  restored  to  its  first  condition  of  trans- 
ferability by  delivery.  Its  registration  does  not,  however, 
afifect  the  coupons  which  pass  by  delivery  alone  and  are 
payable  to  bearer  regardless  of  whether  the  bond  be  regis- 


224 


CORPORATE  BOND  ISSUES 


tered  or  transferable  by  delivery.  This  would  be  the  case 
without  provision  therefor  in  the  bond,  unless  the  coupons 
contained  express  stipulations  to  the  contrary. 

A  shorter  form  of  coupon  bond  as  used  by  a  smaller 
corporation  is  as  follows : 

The  National  Paper  Company 
First  Mortgage  Six  Per  Cent  Gold  Coupon  Bond 

No.  35  $500 

Know  All  Men  By  These  Presents,  That  The  National  Paper 
Company,  a  corporation  organized  and  existing  under  the  laws  of  the 
State  of  New  York,  is  indebted,  and  for  value  received  promises  to  pay, 
to  the  bearer  hereof,  or  to  the  registered  holder  of  this  bond,  if  the 
same  be  registered,  the  sum  of  Five  Hundred  Dollars  ($500)  in  gold 
coin  of  the  United  States  of  the  present  standard  of  weight  and  fine- 
ness, on  the  first  day  of  October,  1921,  at  the  office  of  the  said  Com- 
pany, in  the  City  of  New  York,  with  interest  at  the  rate  of  six  per  cent 
per  annum,  payable  semiannually  at  said  office,  in  like  gold  coin,  on  the 
first  days  of  October  and  April  in  each  year,  upon  surrender  of  the 
annexed  coupons  therefor  as  they  severally  mature. 

Both  the  principal  and  interest  of  this  bond  are  payable  without 
deduction  for  any  United  States,  State,  Municipal,  or  other  tax  or  taxes 
which  said  The  National  Paper  Company  may  be  required  to  pay  or 
deduct  therefrom  under  or  by  reason  of  any  present  or  future  law,  the 
said  Company  hereby  agreeing  to  pay  such  tax  or  taxes. 

This  bond  is  one  of  a  series  of  coupon  and  registered  bonds  of  The 
National  Paper  Company,  bearing  interest  at  the  rate  of  six  per  cent 
per  annum,  issued  or  to  be  issued  in  pursuance  of,  and  subject  to,  the 
terms  of  the  mortgage  or  deed  of  trust  hereinafter  referred  to,  but  so 
that  the  aggregate  amount  of  said  bonds,  both  coupon  and  registered, 
shall  not  exceed  the  total  sum  of  Thirty  Thousand  Dollars  ($30,000). 
All  of  said  bonds  are  equally  secured  by  a  mortgage  or  deed  of  trust, 
dated  October  i,  1916,  executed  by  The  National  Paper  Company  to 
Charles  White  of  the  City  of  New  York,  as  Trustee,  conveying  the 
property  and  franchises  of  The  National  Paper  Company  mentioned 
in  said  mortgage  or  deed  of  trust,  to  which  reference  is  hereby  made 
for  a  description  of  the  property  and  franchises  mortgaged,  and  the 
nature  and  extent  of  the  security,  and  the  rights  of  the  holders  of  said 
bonds  under  the  same,  and  the  terms  and  conditions  upon  which  said 
bonds  are  issued  and  secured. 

This  bond  may  be  registered,  in  the  name  of  the  owner,  on  the 


BOND  FORMS  225 

books  of  the  Qjtnpany,  such  registration  to  be  indorsed  hereon,  and 
thereafter  no  transfer  shall  be  valid  unless  made  on  the  books  of  the 
Company  by  the  registered  owner  and  similarly  indorsed  hereon,  but 
said  bond  may  again  be  made  payable  to  bearer  by  like  transfer,  and 
thereafter  pass  by  delivery  until  again  registered.  Notwithstanding 
such  registration  the  coupons  hereon  shall  remain  and  be  negotiable  by 
delivery  and  payable  to  bearer  on  presentation. 

This  bond  shall  not  become  obligatory  for  any  purpose  until  it  shall 
have  been  authenticated  by  the  certificate,  hereon  indorsed,  of  the 
Trustee  under  said  mortgage  or  deed  of  trust. 

In  Witness  Whereof,  The  National  Paper  Company  has  caused 
these  presents  to  be  signed  by  its  President,  and  its  corporate  seal  to 
be  hereunto  affixed,  and  to  be  attested  by  its  Secretary,  and  coupons 
for  said  interest,  with  the  engraved  signature  of  its  Treasurer,  to  be 
attached  hereto,  this  ist  day  of  October,  1916. 

The  National  Paper  Company 

[Seal]  By 


.  President 

Attest : 


Secretary 

§  205.    Form  and  Nature  of  Coupon 

A  coupon,  as  already  stated  (§  185),  is  In  form  a 
promissory  note.  It  is  attached  to  the  bond  as  a  convenient 
method  of  indicating  the  amount  and  the  due  date  of 
interest,  and  of  the  collection  of  this  interest  when  due. 
One  coupon  is  attached  to  the  bond  for  each  interest  instal- 
ment. Thus  a  twenty-year  bond  with  semiannual  interest 
payments  would  carry  forty  coupons.  These  coupons  are 
numbered  serially,  and  also  carry  the  number  of  the  bond 
to  which  they  are  attached.  Coupon  No.  i  represents  the 
interest  that  will  be  due  at  the  first  interest  period.  As  soon 
as  that  period  arrives,  the  coupon  is  said  to  mature,  and  it 
is  then  detached  from  the  bond  and  either  presented  for 
payment  or  deposited  for  collection,  as  would  be  done  with 
any  other  promissory  note.  Coupons  may  be  detached  from 
the  bond  before  maturity  and  sold  independently  of  the 


226  CORPORATE  BOND  ISSUES 

bond.  The  possession  of  the  coupon  is  sufficient  evidence 
of  ownership  in  the  absence  of  proof  to  the  contrary,  and, 
as  a  coupon  is  payable  to  bearer,  no  indorsement  is  necessary 
or  usual  when  it  is  presented  for  payment  or  deposited  for 
collection. 

When  an  interest  payment  on  coupon  bonds  is  about  to 
fall  due,  the  amount  necessary  to  meet  the  maturing"  cou- 
p>ons  is  usually  deposited  in  some  designated  bank  or  trust 
company  which  acts  for  the  corporation  and  pays  the  cou- 
pons as  they  are  presented.  The  coupons  are  then  cancelled 
and  are  pasted  in  the  coupon  register  (§  214). 

The  form  of  coupon  used  in  connection  with  the  bond 
of  the  United  States  Steel  Corporation  shown  on  the  pre- 
ceding pages  is  as  follows : 

No $.... 

Coupon  for  $ ,  gold  coin  of  the  United  States  of  America, 

payable  to  bearer  on  the  first  day  of  ,  at  the 

office  or  agency  of  the  United  States  Steel  Corporation  in  the  City  of 

New  York,  without  deduction  for  taxes,  for months  interest 

due  on  that  day  on  the   $ Ten-Sixty-Year   Five    Per 

Cent  Sinking  Fund  Gold   Bond   of   United    States   Steel    Corporation, 

No ,  subject  to  the  terms  of  said  bond,  and  of  the  indenture 

dated  April  i,  1903,  therein  mentioned. 


Treasurer 
Coupon  (U.  S.  Steel  Corporation) 

§  206.    Trustee's  Certificate 

Bonds  issued  under  a  deed  of  trust  must  be  certified  by 
the  trustee  before  they  are  issued.  The  trustee's  certificate 
appears  on  the  back  of  each  bond,  and  evidences  the  fact 
that  the  bond  is  one  of  the  issue  mentioned  in  the  deed  of 
trust.  This  certification  is  not  part  of  the  bond,  though 
it  may  be  required  before  the  bond  itself  can  be  considered 
as  issued,  nor  is  it  in  any  sense  an  indorsement  of  the  bond 


BOND   FORMS  227 

nor  a  certification  of  its  correctness  as  to  form  or  subject 
matter.  The  object  of  the  trustee's  certificate  is  to  identify 
the  bond  and  to  prevent  overissues.  If  the  trustee  certifies 
more  bonds  than  are  called  for  by  the  deed  of  trust,  he 
may  make  himself  personally  responsible  for  the  overissue, 
but  he  incurs  no  liability  whatsoever  by  reason  of  any 
proper  certification. 

The  form  of  trustee's  certificate  indorsed  on  the  bonds 
of  the  United  States  Steel  Corporation  is  as  follows : 

This  Is  To  Certify  that  this  bond  is  one  of  the  issue  of  bonds  of 
United  States  Steel  Corporation  mentioned  in  the  indenture  dated  April 
I,  1903,  within  jeferred  to,  executed  by  United  States  Steel  Corpora- 
tion to  the  undersigned  as  Trustee. 

United  States  Trust  Company  of  New  York 

By 

Trustee's  Certificate 

§  207.    Deed  of  Trust 

A  deed  of  trust  is  a  mortgage  on  certain  specified  prop- 
erty given  to  a  trustee  who  acts  for  the  holders  of  the  bonds 
secured  thereby.  The  deed  of  trust  recites  at  length  the 
terms  and  conditions  under  which  the  bonds  are  issued  and 
under  which  the  property  for  their  security  is  held. 

A  modern  deed  of  trust  is  usually  a  very  comprehensive 
and  formidable  instrument.  A  brief  form  may  occupy 
perhaps  from  ten  to  twenty  pages  of  printed  matter.  More 
extended  forms  frequently  occupy  one  hundred  pages  or 
more. 

In  the  bond  itself  reference  is  always  made  to  the  deed 
of  trust  by  which  it  is  secured,  and  in  the  deed  of  trust  the 
bond  is  recited  in  full.  The  bond  by  express  terms  is  sub- 
ject to  the  conditions  of  the  deed  of  trust.  Accordingly, 
the  statements  of  the  bond  are  controlled  by  the  explana- 
tions and  any  non-conflicting  conditions  of  the  deed  of  trust. 


228  CORPORATE  BOND  ISSUES 

If  the  deed  of  trust  should  fail  for  any  reason,  the  bonds 
then  become  the  unsecured  obligation  of  the  corporation, 
and  take  their  place  on  a  parity  with  the  other  unsecured 
corporate  debts. 

§  208.    Recitals  of  Deed  of  Trust 

In  the  deed  of  trust  usually  employed,  the  preamble 
recites  the  conditions  precedent  to  the  issue,  gives  the  form 
of  bond  in  full,  and  the  form  of  coupon  and  trustee's  cer- 
tificate, also  in  full ;  followed  by  the  granting  clauses,  which 
include  a  description  of  the  property  covered,  and  by  the 
trust  reservation  with  stipulation  for  equal  participation  of 
all  the  bonds  of  that  issue  in  the  protection  afforded  by  the 
mortgaged  property. 

Following  this  come  the  "covenants,  conditions,  uses, 
and  trusts"  subject  to  which  the  bonds  are  issued  and  the 
mortgaged  property  is  held.  These  have  a  wide  range. 
Some  of  the  more  usual  of  the  matters  provided  for  are 
as  follows : 

1.  Procedure  for  execution,  certification,  and  delivery 

of  bonds. 

2.  Enjoyment  of  property  by  mortgagee  until  default. 

3.  Payment  of  principal  and  interest  without  deduc- 

tion for  taxes,  and  in  "gold  coin,"  "legal  tender," 
or  otherwise,  as  the  case  may  be. 

4.  Payment  of  all  taxes  and  assessments  on  property 

held  under  the  deed  of  trust,  and,  if  the  nature  of 
the  property  is  such  as  to  require  it,  maintenance 
of  the  same  in  repair,  under  due  insurance  and 
freedom  from  liens. 

5.  Provision  that  the  deed  of  trust  shall  be  a  first  mort- 

gage— if  such  is  the  case — and  be  duly  executed, 
recorded,  and  maintained. 


BOND  FORMS  229 

6.  Provision  for  any  necessary  additional  assurances 

for  protection  of  bondholders. 

7.  Provision  for  trustee  to  enter  upon  property  and 

conduct  business  without  foreclosure  under  cer- 
tain conditions, 

8.  Creation  of  sinking  fund  for  retirement  of  bonds. 

9.  Procedure  for  foreclosure  in  case  of  default. 

ID.  Provision  that  bonds  shall  be  matured  by  failure  to 
pay  interest. 

11.  Stipulation  that  loans,  advances,  or  payments  made 

on  coupons  for  account  of  the  mortgagee  shall 
not  keep  such  coupons  alive, 

12.  Provision  for  redemption  of  bonds. 

13.  Provision  for  discharge  of  deed  of  trust. 

14.  Provision  for  substitution  or  appointment  of  new 

trustee. 

15.  Disclaimer  of  responsibility  on  part  of  trustee. 

16.  Interpretation  of  terms  used  in  deed  of  trust. 

17.  Provision  that  deed  of  trust  may  be  executed  in 

duplicate. 

In  addition  to  these  common  provisions,  others  are 
often  dictated  by  particular  conditions.  Thus,  if  both  regis- 
tered and  coupon  bonds  are  issued,  provision  must  be  made 
for  registration  and  for  the  exchange  of  one  kind  of  bond 
for  the  other  if  this  is  prescribed.  Provisions  may  also  be 
inserted  for  the  issue  of  temporary  certificates,  or  for  re- 
placement of  destroyed  or  mutilated  bonds,  or  for  dis- 
crimination against  coupons  detached  or  assigned  before 
maturity,  or  for  exemption  of  the  stockholders  and  officers 
of  the  issuing  company  from  all  liability  under  the  deed  of 
trust  or  for  the  bonds  issued  thereunder.  In  a  mortgage 
on  realty  it  may  be  provided  that  upon  payment  to  the 
trustee  of  a  certain  specified  price,  parts  of  the  property 


230  CORPORATE  BOND  ISSUES 

may  be  sold  free  from  the  encumbrance  of  the  mortgage, 
or  that  under  prescribed  conditions  properties  may  be  with- 
drawn from  the  mortgage  and  new  properties  substituted 
in  their  place. 

§  209.    Duties  of  Trustee 

The  duties  of  the  trustee  under  a  deed  of  trust  are 
usually  few,  but  may  be  onerous.  He  certifies  each  bond 
issued.  At  times  the  recording  of  the  deed  of  trust  is  made 
one  of  his  duties.  In  case  of  default  he  is  usually  required 
either  to  take  possession  of  the  property  and  operate  it  or 
sell  it,  according  to  the  conditions  of  the  deed  of  trust,  for 
the  benefit  of  the  bondholders.  If  called  upon  to  operate 
the  property,  his  duties  and  liabilities  may  be  heavy.  If 
the  property  is  operated  at  a  loss,  he  may  be  responsible 
for  the  deficit. 

The  trustee  makes  an  annual  charge  for  the  service 
rendered  to  the  issuing  corporation,  but  as  a  rule  the  duties 
are  few  and  the  fee  correspondingly  low. 

§  210.    Execution  and  Filing  of  Deed  of  Trust 

The  deed  of  trust  is  executed  with  the  same  formality 
as  a  deed  of  land.  It  must  be  signed  and  sealed  both  by 
the  corporation  and  by  the  trustee,  and  be  duly  acknow- 
ledged before  a  notary  public  or  other  duly  authorized 
officer.  The  corporate  signature  is  usually  affixed  by  the 
president,  and  the  corporate  seal  is  affixed  and  attested  by 
the  secretary.  The  acknowledgment  is  also  usually  made 
by  the  president  of  the  corporation,  but  is  of  equal  force 
if  made  by  the  secretary,  treasurer,  or  any  other  duly 
authorized  executive  officer.  It  is  immaterial  whether  the 
deed  of  trust  be  executed  within  the  state  in  which  the 
corporation  was  organized  or  elsewhere. 

If  realty  is  included,  the  deed  of  trust  must  be  filed  in 


BOND   FORMS  23 1 

the  office  of  the  county  clerk  in  every  county  in  which  the 
real  estate  is  situated. 

§  2n.    The  Bond  Register 

If  bonds  issued  by  a  corporation  are  sold  through  an 
underwriting  syndicate,  or  through  a  bank  or  trust  company 
which  acts  as  transfer  agent  and  registrar,  the  corporation 
need  maintain  no  special  record  of  the  transaction  beyond 
making  the  proper  entries  in  its  books  of  account.  If,  how- 
ever, the  bonds  are  sold  by  the  corporation  direct,  the 
treasurer  or  the  accounting  department  must  keep  a  more 
detailed  record,  and  for  this  purpose  a  bond  register  is 
necessary.  If  coupon  bonds  are  issued,  a  coupon  register 
also  must  be  kept  for  each  denomination  of  bond. 

Registered  bonds  are,  as  already  stated  (§  186),  of  two 
classes :  ( i )  bonds  which  are  registered  both  as  to  prin- 
cipal and  interest,  interest  checks  being  issued  on  the  speci- 
fied interest  dates  direct  to  the  holders  of  record;  and  (2) 
bonds  which  are  registered  as  to  principal  only,  the  interest 
being  represented  by  coupons  and  therefore  payable  to  the 
holders  of  these  coupons  upon  surrender  of  the  same. 

The  principal  record  for  the  registered  bond  is  the 
bond  register.  An  index  of  bondholders  is  also  usually 
maintained.  This  is  merely  a  card  list  on  which  is  entered 
the  name  and  address  of  each  bondholder,  together  with 
the  number  of  his  bond,  its  amount,  and  such  other  data 
as  may  be  desirable.  The  card  also  provides  for  a  record 
of  the  party  from  whom  the  bond  was  transferred,  in  case 
it  is  not  an  original  issue,  and  blanks  for  name  of  party  to 
whom  it  is  transferred,  in  case  of  transfer.    (See  page  235.) 

§  212.    Form  of  Bond  Register 

The  bond  register  shown  below  provides  space  for  the 
name  and  address  of  the  holder,  the  number  of  his  bond, 


232 


CORPORATE  BOND  ISSUES 


BOND  FORMS 


233 


234  CORPORATE  BOND   ISSUES 

the  date  it  was  acquired,  the  party  to  whom  transferred, 
and  twenty  columns  for  twenty  interest  payments.  Thus  a 
complete  record  is  provided  for  a  ten-year  bond  on  which 
interest  is  payable  semiannually. 

When  a  registered  bond  is  transferred,  a  new  one  is 
issued  on  surrender  of  the  old,  just  as  a  new  stock  certificate 
is  issued  when  stock  is  transferred.  The  surrendered  bond  is 
cancelled  and  filed,  and  in  the  bond  register  a  red-ink  line 
is  ruled  through  the  name  and  address  of  the  former  owner, 
and  through  the  number  and  amount  of  the  cancelled  bond 
itself.  Also  the  number  of  the  new  bond  is  written  directly 
after  the  last  entry  of  interest  payment  on  the  old  bond,  as 
indicated  on  the  form  shown.  A  line  ruled  through  the 
remaining  interest  columns  then  completely  cancels  the 
line  devoted  to  the  cancelled  bond,  though  the  original  entry 
still  shows  the  transfer  of  the  old  bond  and  the  number  of 
the  new  bond  by  which  it  was  replaced.  The  name  and 
address  of  the  owner  of  the  new  bond  is  then  recorded  on 
the  first  vacant  line  of  the  bond  register  in  the  column 
headed  "To  Whom  Issued,"  and  the  record  of  the  transfer 
is  complete. 

As  will  be  noted,  the  bonds  are  entered  in  numerical 
order,  and  any  special  bond  may  be  readily  located  if  its 
number  is  known.  If  the  number  is  not  known  but  the 
name  of  the  owner  is,  the  bond  may  be  traced  through  the 
index  of  bondholders.  If  desired,  the  number  of  the  page 
of  the  bond  register  on  which  the  individual's  name  appears 
can  be  entered  on  the  index  of  bondholders,  a  copy  of  which 
is  shown  on  page  235. 

The  difference  between  the  footings  of  the  "Amount" 
columns  of  the  bond  register  and  the  sum  total  of  all  bonds 
cancelled — which  is  obtained  by  adding  together  all  amounts 
through  which  the  red-ink  line  is  drawn — should  agree  with 
the  balance  of  the  Bond  account  in  the  general  ledger. 


BOND  FORMS 


235 


BOND  NO. 
£uss 


AMOUNT  y/<?gg 


NAMF    ^OuftJA^^    Qo?uv^(£'. 


CLASS 


BONDHOLDER'S  ADDRESS 


TRANSrCRRElD  TO 


Post  Office 


Tinoo^^ 


Name 


County 


State 


%^j^f«^i^ 


Address 


Street  and  No. 

S(><J  ^^fioT^l^xiy  Oat/. 


Transferred  From     /? 


Index  of  Bondholders 


If  the  bonds  are  not  coupon  bonds,  interest  is  computed 
on  each  at  the  half-yearly  or  yearly  interest  dates,  and 
recorded  under  the  proper  interest  period  in  the  bond 
register.  At  the  same  time,  interest  checks  are  issued  to 
the  registered  holders.  The  sum  total  of  the  footings  of  the 
"Interest"  columns  should  agree  with  the  total  amount  of 
interest  checks  issued,  and  is  charged  through  the  cash  book 
to  the  "Accrued  Interest  on  Bonds"  account.  This  is  on 
the  assumption  that  accrued  bond  interest  is  entered 
monthly  or  at  least  prior  to  the  date  of  payment. 

Interest  checks  are  made  out  direct  from  the  bond 
register.  For  the  sake  of  accuracy,  it  is  advisable  to  arrange 
these  interest  checks  alphabetically  and  compare  the  names 
of  the  payees  with  the  names  shown  by  the  cards  of  the 
index  of  bondholders.  This  reduces  to  a  minimum  the 
possibility  of  checks  being  made  payable  to  the  wrong 
person. 

The  register  for  coupon  bonds  does  not  show  interest 
payments,  but  merely  the  ownership  of  the  bonds.  In  such 
case  the  rulings  for  interest  payments  are  omitted.     The 


236  CORPORATE  BOND   ISSUES 

bonds  are  entered  as  presented  for  registry  rather  than 
numerically  as  is  the  case  with  registered  bonds. 

§  213.    Payment  of  Coupons 

Coupons  are  generally  presented  for  payment  at  the 
office  of  the  fiscal  agent  or  trustee,  in  envelopes  specifying 
the  title  of  the  security,  number  and  amount  of  the  coupons, 
and  the  name  of  the  concern  or  individual  presenting  them. 
Payment  is  made  by  check  when  possible,  and,  of  course, 
out  of  funds  supplied  by  the  issuing  corporation.  The  cou- 
pons are  cancelled  by  having  one  or  more  holes  punched  in 
them ;  all  cancelled  coupons  are  kept  together,  and  at  proper 
intervals  are  sent  to  the  company  which  issued  the  security, 
with  a  statement  of  the  account  showing  the  total  coupons 
paid  and  the  amount  still  outstanding. 

The  following  is  a  form  of  report  of  coupons  paid?: 

The  Annuity  Trust  Company 

Philadelphia,  Pennsylvania 
Gentlemen : 

We  send  you  herewith  by   a  package  containing 

cancelled  coupons    amounting  to  $ ,  from 

bonds  of  your  Company  as  set  forth  in  the  attached  receipt,  having 
been  paid  by  us  out  of  funds  deposited  by  your  Company  for  that 
purpose. 

Please  sign  and  return  the  accompanying  receipt 
Very  truly  yours, 


Manager,  Corporate  Trust  Department 
Report  of  Coupons  Paid 


Attached  to  this  report,  or  accompanying  it,  is  a  receipt 
setting  forth  the  amounts  and  the  numbers  of  the  various 
cancelled  coupons.  This  is  signed  by  the  company  issuing 
the  bonds  and  returned  to  the  trustee.  A  common  form  of 
receipt  reads  about  as  follows : 


BOND   FORMS  237 


Trust  Department 

The  Annuity  Trust  Company 
Philadelphia,  Pennsylvania 

$ Date 


Received  of  The  Annuity  Trust  Company  the  following : 

coupons  * for  $ for  interest 

due  date  on  bonds  of   

Company,  numbered  (here  give  the  numbers  of  the  coupons  cancelled), 
duly  cancelled  and  paid  by  said  Trust  Company  out  of  funds  deposited 
by  this  Company  for  that  purpose. 


Treasurer 
Receipt  for  Coupons  Paid 


§  214.    The  Coupon  Register 

Coupon  bonds  registered  as  to  principal  are  entered  in 
the  bond  register,  and  an  alphabetical  card  index  of  bond- 
holders is  provided  for  each  denomination  of  bonds  issued. 
A  coupon  register  is  also  provided  for  the  proper  record 
of  paid  coupons. 

If  coupon  bonds  are  not  registered,  but  are  transferred 
by  delivery,  the  bond  register  and  the  card  index  of  bond- 
holders are,  of  course,  unnecessary,  the  coupon  register  alone 
being  maintained.    This  coupon  register  is  shown  below. 

An  entire  page  of  the  coupon  register  is  required  for 
the  record  of  each  bond,  and  all  paid  coupons  belonging 
to  that  bond  are  pasted  on  the  page  allotted  to  it  in  the 
space  numbered  to  correspond  with  the  particular  coupon. 
The  method  of  using  the  coupon  register  is  simple.  As  will 
be  noted,  the  number,  the  amount,  and  a  brief  description 
of  each  bond  are  entered  at  the  top  of  the  page  devoted  to 
that  bond.  As  each  coupon  comes  in  and  is  paid,  it  is 
pasted  over  its  number  on  this  page.  A  glance  at  the 
coupon   register   will   therefore   show   at   any   time   what 


238 


CORPORATE  BOND  ISSUES 


E  455 


METROPOLITAN  INVESTMENT  CO. 

BOND  REGISTER 
*  IPOO  «  6  %  TRUST  BOND 

Dated    yGi^t/^jg/^  [)ue_^j/^-  /.  i93^First  Coupon du&.^^-4f  >.  »^^ 


14 


20 


D 


19 


16 


12 


i     CANCELLED        ' 
!        COUPON  I 


Coupon  Register 

coupons  have  been  paid  and  also  what  coupons  are  due 
but  unpaid. 

A  special  bank  account  should  be  kept  for  the  payment 
of  coupons,  and  the  balance  of  this  bank  account  should 
agree  with  the  total  amount  of  the  coupons  due  and  unpaid 
as  shown  by  the  coupon  register. 


CHAPTER    XVII 

BOND    SALES 

§  215.    Selling  the  Bonds 

After  the  bond  issue  is  authorized  and  all  other  pre- 
liminary formalities  completed,  the  important  question  is, 
"How  can  the  bonds  be  sold  to  the  best  advantage?"  This 
question  can  be  answered  only  in  the  light  of  specific  con- 
ditions— as,  for  instance,  the  stability  of  the  issuing  com- 
pany, the  kind  and  condition  of  property  offered  as  se- 
curity, whether  or  not  the  bonds  are  indorsed  or  guaran- 
teed by  a  stronger  company,  the  rate  of  interest  to  be 
paid,  the  length  of  time  to  run,  the  redemption  provisions, 
and  the  condition  of  the  money  market  at  the  time  of 
sale.  The  manner  of  disposing  of  the  bonds  and  the 
agencies  through  which  they  are  to  be  sold  also  have  an 
important  bearing  upon  the  success  of  the  issue.  If  they 
are  sold  through  some  well-known  banking  house,  their 
attractiveness  is  much  increased,  for  this  practically 
amounts  to  an  indorsement  of  the  bonds,  as  such  bankers 
before  taking  bonds  for  sale  always  make  a  careful  inves- 
tigation of  the  reliability  of  the  issuing  company  and  of 
the  conditions  underlying  the  bonds.  For  this  purpose 
the  larger  bond  houses  employ  a  staff  of  experts  com- 
posed of  engineers,  appraisers,  attorneys,  accountants,  etc. 

Large  bond  issues  are  nearly  always  sold  to,  or 
through,  underwriting  syndicates  or  financial  institutions 
which  make  a  business  of  such  work.  The  syndicate  or 
banker  agrees  to  take  the  bonds  at  a  certain  figure  and 
to  assume  the  risk  of  selling  them.    If,  as  is  sometimes  the 

239 


240 


CORPORATE  BOND  ISSUES 


case,  bonds  are  sold  through  a  financial  agent,  this  agent 
simply  acts  for  the  corporation,  selling  the  bonds  at  the 
highest  figure  possible  and  receiving  his  compensation  in 
commissions. 

Bonds  may  sell  at,  or  below,  their  par  value,  or  at  a 
premium,  depending  upon  the  stabiHty  of  the  issuing  com- 
pany and  the  rate  of  interest  to  be  paid.  The  bonds  may 
be  all  or  partly  sold  at  the  time  of  issue,  and  those  that 
have  been  disposed  of  may  be  paid  for  in  monthly  or 
periodical  instalments.  In  any  case,  there  are  numerous 
expenses  incident  to  a  bond  issue,  and  these  may  either  be 
charged  immediately  to  operating  expenses  or  spread  over 
a  term  of  years. 

§216.    Bond  Issue  Regulations 

A  proposed  bond  issue  of  a  public  utility  corporation 
must  have  the  sanction  of  the  public  service  commission 
of  the  state  in  which  the  corporation  is  located  before  it 
may  be  issued.  This  serves  as  a  protection  to  the  public 
at  large,  the  stockholders  of  the  corporation,  and  the  pur- 
chasers of  the  bonds.  Not  only  do  these  commissions 
regulate  the  bond  issues  of  corporations,  but  they  pre- 
scribe among  other  things  the  classifications  of  accounts 
to  be  used  by  companies  operating  within  their  jurisdic- 
tion. The  following  entries  for  bond  issues  of  public 
utility  companies  are  in  accordance  with  commission  regu-. 
lations. 

Commission  regulations  place  bond  issues  under  the 
heading  of  "Funded  Debt,"  each  issue  being  designated 
by  the  kind  and  tenor  of  the  debt  obligation  incurred. 
The  manner  of  making  entries,  however,  differs  slightly, 
if  at  all,  whether  the  bonds  are  of  one  kind  or  another. 
Commission  regulations  as  to  bond  issues  are  very  much 
the  same  in  different  states. 


BOND   SALES  24 1 

§  217.    First  Mortgage  Bonds  Sold  at  Par 

To  illustrate  the  sale  of  bonds  at  par,  we  will  assume 
that  the  directors  and  stockholders  of  the  Lenox  Iron 
Works  have  authorized  January  i,  191 6,  an  issue  of  first 
mortgage  gold  bonds  for  $1,000,000,  having  twenty  years 
to  run,  with  interest  at  5%,  payable  semiannually  on  the 
first  day  of  January  and  July.  The  bonds  are  coupon  in 
form  with  the  privilege  of  registration  as  to  principal. 

Under  these  circumstances,  it  might  be  permissible  to 
ignore  the  matter  as  far  as  the  books  of  account  are  con- 
cerned, until  the  bonds  are  sold,  at  which  time  an  entry 
would  be  made  only  for  those  sold,  as  shown  below.  It 
seems  prudent,  however,  to  have  a  transaction  of  such  im- 
portance placed  upon  the  books  immediately.  For  this 
purpose,  at  the  date  of  issue  and  before  sale  of  the  bonds, 
an  entry  is  made  as  follows: 

January  i,  1916 

Unissued  First  Mortgage  Bonds $1,000,000 

To  First  Mortgage  Bonds $1,000,000 

Authorized  issue  of  $1,000,000  first  mort- 
gage 5%  twenty-year  gold  bonds  as 
sanctioned  this  day  by  the  directors 
and  stockholders. 

Instead  of  "Unissued  Bonds,"  some  other  appropriate 
title  for  the  account  may  be  used,  if  desired,  as  "First 
Mortgage  Treasury  Bonds,"  "Unsold  First  Mortgage 
Bonds,"  etc.  The  credit  entry  may,  if  desired,  be  made 
to  "First  Mortgage  Bonds  Payable,"  "Authorized  First 
Mortgage  Bonds,"  "Bonds  Payable,"  or  any  other  caption 
that  will  designate  the  issue  clearly.  If  there  are  differ- 
ent issues,  the  caption  may  distinguish  them  by  indicating 
the  interest  rate,  the  life,  or  the  due  date  of  the  bonds,  as 
"First  Mortgage  5%  Gold  Bonds  of  1950"  or  "First  Mort- 
gage 6%  Twenty- Year  Bonds,"  etc. 


242 


CORPORATE  BOND  ISSUES 


§  218.    Entry  on  Sale  of  Bonds 

If  the  entire  issue  of  bonds  is  sold  by  the  issuing 
company  for  cash,  the  following  entry*  should  be  made: 

Cash $1,000,000 

To  Unissued  First  Mortgage  Bonds  $1,000,000 

Sale  at  par  of  the  entire  issue  of  first 
mortgage  bonds  as  authorized  by  the 
directors. 

In  case  the  bonds  are  paid  for  in  property  of  some 
kind,  then,  of  course,  the  property  received  is  debited  in 
place  of  cash. 

If  the  bonds  were  not  recorded  on  the  books  at  the 
time  of  authorization,  the  cash  book  entry  would  be: 

Cash $1,000,000 

To  First  Mortgage  Bonds $1,000,000 

Sale  at  par  of  the  entire  issue  of  first 
mortgage  5%  twenty-year  gold  bonds 
as  authorized  by  the  directors. 

In  case  only  a  part  of  the  bond  issue  has  been  taken 
at  the  date  of  issue,  then  a  cash  book  entry  to  Unissued 
Bonds  account  must  be  made  for  only  the  sum  taken. 
Subsequent  sales  of  bonds  for  cash  should  be  recorded  in 
the  same  manner.  In  the  sale  of  bonds  after  date  of  issue, 
however,  the  element  of  accrued  interest  is  involved  in  the 
sale  price  and  must  be  included. 

Unsold  bonds  should  not  appear  as  an  asset  in  the 
balance  sheet.  In  order  that  the  sold  and  unsold  bonds 
may  be  clearly  distinguished,  they  should  appear  in  the 
balance  sheet  about  as  follows: 

First  Mortgage  5%  Gold  Bonds: 

Total  Amount  Authorized $1,000,000 

Less  Unsold  Bonds 500,000 

Bonds  Issued  and  Outstanding $500,000 

*A11  cash  book  entries  are,  as  a  matter  of  convenience,  shown  in  journal  form. 


BOND  SALES  243 

§  219.    Bonds  Sold  at  Par  and  Accrued  Interest 

Inasmuch  as  the  entire  bond  issue  bears  the  date  of 
authorization,  it  is  apparent  that  interest  will  have  accu- 
mulated on  all  bonds  sold  on  subsequent  dates.  It  mat- 
ters not  whether  the  bonds  are  sold  at  par  or  otherwise; 
interest  will  have  accrued  on  the  par  value  thereof  to  the 
date  of  sale,  and  the  investor  is  expected  to  add  it  to  the 
purchase  price  of  the  bonds.  In  that  case  the  cash  book 
entry  would  be  as  follows,  assuming-  that  $500,000  of 
bonds  were  sold  three  months  after  the  bonds  were 
issued. 

April  I,  1916 

Cash $506,250 

To  Unissued  First  Mortgage  Bonds....  $500,000 

"    First  Mortgage  Bond  Interest 6,250 

Sale  of  $500,000  of  first  mortgage  bonds  and 
accrued  interest  on  same  at  5%  for  three 
months. 

Payment  of  the  full  amount  of  accrued  interest  is  in 
effect  a  payment  of  interest  before  it  is  due,  and  in  the 
present  illustration  the  purchaser  loses  the  interest  on 
$6,250  from  date  of  payment  until  the  next  interest  date, 
i.e.,  three  months.  Outside  of  this,  there  is  neither  a  loss 
nor  a  profit  to  either  party,  since  in  three  months  after 
the  given  date  the  company  will  pay  the  entire  interest  on 
all  outstanding  bonds  for  the  first  half-year;  at  that  time 
the  purchaser  will  receive  back  the  interest  money  ad- 
vanced by  him,  and  in  like  manner  the  company  will  re- 
turn the  interest  thus  received.  If  the  sale  were  deferred 
until  the  first  or  some  subsequent  interest  date,  accrued 
interest  would  not  enter  into  consideration  at  all,  for  at 
that  time  the  company  would  clip  all  coupons  from  the 
unsold  bonds  and,  after  cancellation,  paste  them  in  the 
coupon  register  without  further  entry. 


244 


CORPORATE  BOND  ISSUES 


§  220.    Bond  Subscriptions  Paid  For  in  Instalments 

If  bonds  are  sold  directly  to  the  public  by  the  issuing 
company,  or  even  through  brokers  on  a  commission  basis, 
it  is  not  unusual  to  allow  the  purchasers  a  term  of  months 
in  which  to  make  their  payments,  the  instalments  being 
due  at  designated  intervals.  If  the  present  bond  issue  had 
been  sold  to  subscribers  on  the  instalment  plan,  the  entry 
would  be: 

January  i,  1916 

Bond  Subscriptions $1,000,000 

To  Unissued  First  Mortgage  Bonds..  $1,000,000 

Sale  of  $1,000,000  of  bonds  to  sundry 
subscribers  at  par,  payable  one- 
quarter  down  and  the  balance  in  three 
monthly  payments  of  one-quarter  each 
on  the  first  day  of  each  month.  (  Names 
of  subscribers  should  be  entered  on 
separate  sheets  or  in  a  subsidiary  sub- 
scription ledger  provided  for  the 
purpose.) 

Bond  Subscriptions  should  be  credited  as  payment  of 
each  instalment  is  made,  and  official  receipts  be  issued 
therefor.  When  payments  are  completed,  the  instalment 
receipts  are  returned  and  the  bonds  issued.  The  deferred 
instalments  may  perhaps  bear  interest  at  a  given  rate,  or 
at  the  same  rate  the  bonds  are  to  draw,  in  which  case  an 
additional  credit  to  Bond  Interest  account  for  the  interest 
received  is  necessary,  which  in  turn  will  offset  an  equiva- 
lent charge  to  the  same  account.  Monthly  balance  sheets 
made  during  the  interval  would  of  course  show  the  amount 
of  bond  subscriptions  deferred. 

Instalment  payments  may  obtain  when  bonds  are  sold 
to  the  company's  bankers.  In  that  event  the  entire  con- 
tract amount,  after  allowance  for  discount,  if  any,  should 
be  charged  up  to  the  brokers  as  shown  below: 


BOND   SALES  245 

Barton  and  Day,  Bankers $1,000,000 

To  Unissued  First  Mortgage  Bonds 

(or  to  First  Mortgage  Bonds) ....  $1,000,000 

Entire  issue  of  first  mortgage  bonds  sold 
at  100  flat,  payable  $400,000  down 
and  the  balance  in  two  instalments  of 
$300,000  each,  due  in  one  and  two 
months  respectively. 

Credit  is,  of  course,  given  Barton  and  Day,  as  payments 
are  made  by  them. 

§  221.    Guaranteed  Bonds 

When  bonds  of  one  corporation  are  guaranteed  by 
another  corporation,  it  is  manifest  that  the  guaranteeing 
corporation  must  constantly  hold  itself  in  readiness  to  pay 
the  bond  interest  upon  any  default  on  the  part  of  the 
issuing  company;  but  were  such  payment  made,  it  would 
be  considered  only  as  an  advance  or  loan  to  the  subsidiary 
company,  from  whom  repayment  would  be  expected  at 
some  future  date.  The  entries  to  be  made  on  the  issuing 
and  guaranteeing  companies'  books  should  be  in  harmony. 

As  to  whether  or  not  a  ledger  entry  is  required  by 
either  company  at  the  time  bonds  are  guaranteed,  as  an 
official  record  of  the  conditions,  depends  on  the  wishes  of 
the  directors.  If  a  minute  of  such  guarantee  is  clearly  set 
forth  in  the  official  records  of  each  company,  that  should 
suffice,  since  the  fact  of  the  guarantee  is  conspicuously 
stated  in  the  bonds  themselves  as  well  as  in  the  deed  of 
trust.  A  foot-note  of  the  guarantee  should,  of  course,  be 
made  on  the  balance  sheet  of  the  guaranteeing  company. 

§  222.    Entries  for  Collateral  Trust  Bonds 

As  previously  stated  (§  196),  collateral  trust  bonds 
are  bonds  secured  by  a  deposit  of  stocks  and  bonds  of 
other  corporations.     This  "collateral"  usually  represents 


246 


CORPORATE  BOND  ISSUES 


the  company's  entire  or  partial  ownership  of  companies 
in  the  same  or  similar  lines  of  business,  and  located  in  its 
own  or  in  adjoining  territory.  The  collateral  stocks  and 
bonds  are  deposited  with  a  trustee  in  accordance  with  the 
trust  agreement,  and  the  market  value  of  these  securities 
is  usually  considerably  more  than  the  bonds  which  they 
secure. 

Collateral  trust  bonds  are  frequently  issued  in  the  form 
of  short  term  notes,  or  collateral  trust  serial  notes,  and 
when  issued  by  underlying  companies  they  may  even  be 
"guaranteed"  by  the  holding,  leasing,  or  parent  company. 
The  "guarantee"  is  not  infrequently  given  by  one  or  more 
individuals  who  are  financially  able  to  act  as  surety. 

The  book  entries  for  collateral  trust  bonds  do  not 
differ  materially  from  those  required  for  recording  regular 
mortgage  bonds.  With  the  mortgage  bond,  however, 
though  a  conveyance  under  trust  mortgage  is  made  to  the 
trustee,  the  real  estate  security  remains  in  the  company's 
possession;  while  in  the  case  of  the  collateral  bond,  all  of 
the  security  is  placed  in  the  hands  of  the  trustee.  The 
terms  of  the  trust  indenture  usually  provide  that  the 
collateral  may  be  changed  at  any  time  for  other  collateral 
of  equal  value,  either  at  the  request  of  the  issuing  company 
or  of  the  trustee. 

The  collateral  security  must  be  conveyed  to  tire  trustee 
before  the  actual  sale  of  bonds  begins,  though  this  con- 
veyance does  not  deprive  the  company  of  its  rights  and 
privileges  as  owner  of  the  collateral,  such  as  voting  at 
meetings  of  stockholders,  receiving  the  income  from  its 
investment,  etc.  The  question  now  arises,  what  kind  of 
record  should  be  made  for  the  collateral  deposited  with 
the  trustee?  An  adequate  record  of  the  transfer  should, 
of  course,  be  made  in  the  oflficial  minutes,  and  the  Public 
Service  Commission  of  New  York  requires  that  the  pledged 


BOND   SALES  247 

collateral  must  be  set  forth  in  an  account  by  itself.  Cor- 
porations not  subject  to  commission  regulations  may 
make  entries  in  any  logical  manner,  but  in  all  cases  it  seems 
desirable  to  set  forth  in  a  separate  account  all  pledged 
securities. 

The  stocks  and  bonds  used  as  collateral,  when  first 
purchased,  are  usually  entered  on  the  books  at  the  pur- 
chase price  regardless  of  par  value,  and  are  charged  to 
some  representative  account,  as  "Investments"  or  ''Stocks 
and  Bonds  of  Other  Companies,"  or  to  accounts  repre- 
senting the  kinds  of  securities  purchased. 

On  the  assumption  that  the  collateral  is  standing  in 
an  "Investments"  account  and  has  a  book  valuation  of 
$1,340,000,  the  following  entry  is  required  to  suitably 
record  the  conditions: 

Pledged  Investments   (To  secure  collateral 

trust   bonds) $1,340,000 

To  Investments $1,340,000 

To  record  the  pledge  of  the  following 
collateral  with  the  Hudson  Trust 
Company,  as  security  for  the  issue 
of  $1,000,000  collateral  trust  bonds: 
(Here  list  details  of  the  stocks  and 
bonds  pledged.) 

The  above  entry  removes  the  collateral  entirely  from 
the  Investments  account  and  leaves  therein  only  such 
securities  as  are  still  in  the  company's  possession;  while 
the  Pledged  Investments  account  exhibits  the  book  value 
of  securities  in  the  trustee's  possession.  In  a  manufac- 
turing corporation  an  account  might  be  opened  with  the 
trustee  and  the  collateral  security  stated  therein.  If  there 
are  several  bond  issues,  it  is  desirable  to  have  separate 
accounts  for  the  pledged  collateral  belonging  to  each  issue. 

It  is  obvious  that  the  securities  pledged  to  secure 
collateral  bonds  will  fluctuate  in  value  in  harmony  with 


248  CORPORATE   BOND   ISSUES 

business  conditions,  and,  if  listed  securities,  their  market 
value  can  be  noted  at  any  time.  A  permanent  reduction 
in  the  value  of  the  collateral  deposited,  or  in  any  of  the 
investments  held  by  the  company,  should  be  recorded  in 
the  company's  accounts  by  a  charge  to  Profit  and  Loss 
and  a  credit  to  the  accounts  affected.  In  case  the  value 
of  the  listed  securities  rises,  the  change  of  value  might  be 
recorded  if  it  were  thought  desirable  so  to  do,  by  a  charge 
to  the  accounts  affected  and  a  credit  to  Profit  and  Loss. 
In  case  the  pledged  collateral  falls  below  a  given  margin 
of  safety,  the  trustee  has  the  right  to  call  for  an  additional 
deposit. 

Corporations  which  have  a  considerable  investment 
in  stocks  and  bonds  usually  provide  separate  books  for 
recording  the  details  of  such  investments.  When  this  is 
the  case,  a  notation  in  the  accounts  affected  might  perhaps 
be  considered  a  sufficient  record  of  securities  deposited  as 
collateral,  but  the  entry  shown  above  is  preferable  since 
it  provides  a  more  systematic  record  of  the  conditions. 

§  223.    Entries  for  Short  Term  Notes 

The  opening  entries  for  short  term  notes  do  not  differ 
from  those  required  for  collateral  trust  bonds.  An  entry 
should,  of  course,  be  made  crediting  the  entire  issue  of 
notes  under  whatever  caption  is  necessary,  as  "Three-Year 
Notes,"  "Two-Year  Collateral  Trust  Notes,"  etc.,  and 
debiting  the  cash  received  and  selling  expense.  In  case 
the  notes  are  secured  by  collateral,  an  entry  for  the 
securing  collateral  is  necessary  as  explained  in  the  pre- 
ceding example. 

§  224.    Entries  for  Equipment  Trust  Serial  Bonds 

Equipment  trust  bonds,  or  car  trust  bonds  (frequently 
called  certificates),  are  secured  by  a  mortgage  on  all  or  a 


BOND   SALES  240 

part  of  the  equipment  of  a  railway  company.  The  trust 
agreement  by  its  terms  is  in  the  nature  of  a  lease.  In 
other  words,  the  transaction  is  a  conditional  sale,  the 
company  paying  each  year  an  annual  instalment  on  the 
bonds,  and  the  trustee — acting  for  the  persons  who  ad- 
vanced the  money — holding  a  lien  on  the  entire  property 
specified  imtil  the  last  instalment,  or  rental,  is  paid,  at 
which  time  a  release  is  given.  The  bonds  or  certificates 
are  usually  put  out  in  series,  from  time  to  time,  as  each 
succeeding  series  is  issued,  as  "Series  A,"  "Series  B," 
"Series  C,"  etc.  As  they  are  secured  on  the  equipment, 
the  margin  of  security  increases  automatically  as  the 
annual  instalments  are  paid.  These  usually  begin  to 
mature  early  in  the  life  of  the  property.  Under  the  trust 
indenture,  each  car,  locomotive,  or  other  chattel  is  plainly 
marked  so  as  to  identify  the  mortgaged  property,  which 
the  company  must  maintain  in  proper  efficiency.  While 
the  equipment  comes  at  once  into  the  possession  of  the 
railway  company,  the  full  ownership  is,  from  the  nature 
of  the  case,  deferred  until  the  final  bond  instalment  is  paid, 
when  the  trustee  releases  the  title  to  the  company. 

To  illustrate  the  entries  required  when  equipment  trust 
bonds  are  sold,  assume  that  the  Green  Valley  Railway 
Company  has  issued  equipment  trust  5%  gold  bonds  dated 
July  I,  1 91 6,  for  $4,000,000,  payable  in  instalments  of 
$400,000  each  year  beginning  July  i,  191 7;  the  bonds  are 
secured  by  new  standard  equipment  costing  $5,000,000, 
upon  which  an  initial  payment  of  $1,000,000  has  been 
made  by  the  company.  Since  the  issue  of  equipment  or 
car  trust  certificates  is  subject  to  commission  regulations, 
these  regulations  must  be  followed  in  making  the  entries. 
Assuming  that  the  equipment  was  purchased  through,  and 
the  bonds  given  to,  Murray  Brothers  &  Co.,  bankers,  at 
95,  and  that  a  trust  mortgage  is  made  to  a  trustee  as 


250 


CORPORATE  BOND   ISSUES 


security  for  the  bondholders,  and  that  expenses  connected 
with  the  issue  amount  to  $6,000,  the  required  entries  are 
as  shown  below. 

When  the  trust  is  created  and  the  first  payment  of 
20%  is  made  on  account  of  the  equipment,  the  entry  is : 

July  I,  1916 

Equipment   $1,000,000 

To  Cash $1,000,000 

Initial  payment  of  20%  on  the  follow- 
ing equipment  costing  $5,000,000  pur- 
chased through  Murray  Brothers  & 
Co.,  for  which  $1,000,000  is  paid  in 
cash  and  the  balance  is  satisfied  by 
equipment  bonds.  (Here  give  details 
of  the  equipment  and  bonds,  or  else 
refer  to  the  agreement  where  they 
can  be  found.) 

If  thought  preferable,  the  above  and  following  pay- 
ments might  be  put  through  the  account  of  the  bankers, 
who  are  holders  of  the  lien;  Equipment  and  Leased 
Equipment  being  debited  and  the  bankers  credited  with 
the  entire  purchase  price  of  the  equipment, 

July  I,  1916 

Leased  Equipment $4,000,000 

To  Equipment  Trust  5%  Bonds $4,000,000 

For  issue  of  equipment  trust  bonds  in 
denominations  of  $1,000,  being  balance 
of  payment  of  equipment  purchased 
through  Murray  Brothers  &  Co., 
Bankers,  as  per  trust  agreement.  The 
bonds  mature  $400,000  on  July  i  of 
each  year  during  the  next  ten  years. 


Expense  on  Equipment  Trust  Bonds $6,000 

To  Cash $6,000 

Expenses  incurred  in  connection  with  the 
issue  of  equipment  trust  bonds. 


BOND   SALES  25 1 

As  each  bond  instalment  matures  and  is  paid,  an  entry 
is  required  in  the  bond  account  and  also  in  the  Equipment 
account,  since  the  portion  paid  must  be  transferred  from 
"Leased  Equipment"  to  the  "Equipment"  account.  The 
equipment  is  required,  of  course,  to  be  fully  and  adequately 
maintained  by  the  operating  company.  The  entries  for 
interest  are  required  to  be  made  semiannually,  and 
monthly  adjustments  should  be  made  to  distribute  the 
interest  over  its  period.     The  instalment  entries  are: 

July  I,  1917 

Equipment  Trust  5%  Bonds $400,000 

To  Cash $400,000 

First  instalment  on  equipment  trust  bonds 
paid  this  day,  per  trust  agreement. 

At  the  same  time,  and  at  each  instalment  date  there- 
after, the  following  transfer  entry  is  required : 

Equipment $400,000 

To  Leased  Equipment $400,000 

For  transfer  to  the  Equipment  account,  of 
property  covered  by  current  instalment. 


CHAPTER   XVIII 
BOND    INTEREST 

§  225.    Paying  Bond  Interest 

Under  the  terms  of  the  usual  trust  deed  securing  a 
bond  issue,  the  trustee  is  empowered  to  enter  upon  and 
foreclose  the  mortgage  upon  default  of  interest  payment. 
Therefore,  the  company  is  bound  to  meet  its  bond  interest 
obligations,  or  else  face  a  foreclosure  suit  with  its  possible 
receivership  or  bankruptcy.  Whether  the  profits  are  suf- 
ficient or  not  to  meet  fixed  charges,  the  bond  interest 
must  be  paid. 

Bond  interest  is  usually  paid  semiannually  from  the 
date  of  issue,  but  it  may  be  paid  quarterly  or  annually. 
Interest  on  registered  bonds  is  paid  to  the  registered 
holders  by  checks  sent  out  at  interest  periods  by  the 
company  itself  or  by  its  fiscal  agent,  while  interest  on 
coupon  bonds  is  paid  upon  presentation  of  the  coupons 
at  the  office  of  the  company  or  of  its  fiscal  agent.  The 
coupons  are  sometimes  made  payable  at  any  one  of  two 
or  three  different  agencies.  Owners  of  coupons  may  either 
send  them  direct  to  the  issuing  company  or  agency  and 
receive  a  cash  remittance  in  exchange,  or  deposit  them 
in  their  local  banks  for  collection.  (See  also  §  185,  and 
Chapter  XVI.) 

§  226.    Method  of  Handling  Interest  Coupons 

Using  the  bond  issue  of  $1,000,000  5%  gold  bonds  of 
the  Lenox  Iron  Works,  cited  in  the  preceding  chapter, 
we  assume  that  the  first  interest  period,  July  i,  19 16,  has 

252 


BOND   INTEREST  2^3 

arrived  and  that  $25,000  has  been  turned  over  to  the 
company's  fiscal  agent  for  payment  of  the  coupons  as  they 
are  presented.  On  the  company's  books  the  only  entry 
required  at  the  time  is  the  following,  which,  of  course, 
should  appear  in  the  cash  book : 

July  I,  1916 

Bond  Interest $25,000 

To  Cash $25,000 

For  payment  of  semiannual  bond  interest  on 
$1,000,000  5%  bonds,  due  today  at  the  office 
of  the  trustee.  The  Grove  Street  Trust 
Company,  to  whom  the  check  has  been 
issued. 

The  preceding  entry  is  made  immediately  on  sending 
the  interest  check  to  the  trust  company  or  bank  where 
the  coupons  are  payable.  This  check  is  usually  sent  the 
day  before  the  interest  is  payable  or  perhaps  sooner,  de- 
pending on  the  distance.  When  the  coupons  are  paid  and 
cancelled,  they  are  then  turned  over  to  the  issuing  com- 
pany and  by  them  pasted  in  the  coupon  register  (§  214), 
or  otherwise  disposed  of. 

In  case  the  interest  coupons  are  payable  at  the  office 
of  the  company,  it  is  obvious  that,  with  the  simple 
accounting  system  assumed,  no  entry  would  be  necessary 
until  the  coupons  were  presented  and  paid.  Even  when 
the  coupons  are  payable  at  the  company's  office,  a  special 
bank  account  is  frequently  opened  for  their  payment,  a 
check  being  drawn  for  the  full  amount  and  deposited 
under  a  special  account.  If  the  coupons  were  all  paid  on 
the  due  date,  the  entry  would  be  similar  to  that  given 
above,  the  explanation  showing  that  payment  was  made 
at  the  office.  It  is  but  rarely,  however,  that  this  happens, 
and  when  it  is  not  the  case,  entry  is,  of  course,  made  only 
for  the  coupons  presented  and  paid.     The  amount  still 


254 


CORPORATE   BOND   ISSUES 


outstanding  can  easily  be  calculated,  but  the  bond  interest 
account  itself  will  not  show  its  correct  debit  until  all  of 
the  coupons  have  been  paid.  It  is  apparent,  therefore, 
that  at  the  end  of  each  year  the  books  must  either  be  kept 
open  until  all  coupons  come  in,  or  present  an  incomplete 
record  comprising  only  such  bond  interest  as  has  been 
paid.  Neither  of  these  plans  meets  the  needs  of  present- 
day  accounting.  The  most  approved  plan  is  to  set  up  at 
each  interest  date  the  amount  of  interest  due.  Assuming 
that  this  plan  is  adopted,  the  following  entry  is  necessary 
at  the  end  of  the  preceding  month : 

June  30,  1916 

Bond  Interest $25,000 

To  Bond  Interest  Payable $25,000 

For  half-yearly  bond   interest  due  and  pay- 
able tomorrow. 

Instead  of  "Bond  Interest  Payable,"  the  account  might 
be  termed  "Coupons  Payable"  or  "Bond  Interest  Ac- 
crued." There  is  a  difference,  however,  between  interest 
"due  and  payable"  and  interest  "accrued."  For  instance, 
on  June  i,  1916,  the  larger  portion  of  the  interest  on  the 
bonds  for  the  period  under  consideration  has  accrued,  but  it 
is  not  due  and  payable  until  July  i,  1916. 

Outstanding  coupons  continue  to  be  obligations  of  the 
company  until  paid.  As  the  coupons  are  redeemed, 
charges  are  made  against  Bond  Interest  Payable  account, 
so  that  the  excess  credit  to  this  account  will  show  at  any 
time  the  liability  on  outstanding  coupons.  If  there  are 
several  bond  issues,  an  Interest  Payable  account  might  be 
set  up  for  each. 

Assuming  that  all  of  the  bond  coupons  were  paid  by 
the  company  on  the  due  date,  we  have  the  following 
entry: 


BOND   INTEREST  255 

July  I,  1916 

Bond  Interest  Payable $25,000 

To  Cash $25,000 

For  interest  coupons  presented  and  paid  this 
day. 

At  the  end  of  each  year,  if  not  oftener,  the  Bond 
Interest  account  should  be  closed  into  Profit  and  Loss 
or  into  such  other  account  as  the  system  in  use  may 
call  for. 

§  227.    Interest  on  Registered  Bonds 

In  the  case  of  registered  bonds,  interest  checks  are 
usually  sent  by  the  treasurer  of  the  company  direct  to  the 
holders,  though  not  infrequently  the  checks  are  sent  by 
the  fiscal  agent.  They  are  usually  mailed  so  as  to  reach 
the  payees  on  the  date  when  the  interest  is  due  or  as  soon 
as  possible  thereafter.  The  book  entries  for  accruing  and 
paid  interest  on  registered  bonds  do  not  differ  from  those 
required  and  illustrated  for  interest  on  coupon  bonds.  An 
alphabetical  list  of  the  registered  bondholders  entitled  to 
receive  interest  checks  must  be  prepared  for  each  interest 
period. 

§  228.    Bond  Interest  Accrued  Monthly 

Nearly  all  large  corporations  require  monthly  state- 
ments of  income  and  operating  expenses  and  statements 
of  condition,  so  that  it  becomes  necessary  at  the  end  of 
each  month  to  compile  the  various  expenses  belonging  to 
that  period.  These  expenses  obviously  comprise  not  only 
the  current  expenses  and  pay-roll,  but  a  proportionate 
share  of  prepaid  and  accruing  charges,  as  interest,  dis- 
count, taxes,  insurance,  etc.  Bond  interest  is  generally 
payable  half-yearly,  so  that  each  monthly  statement 
should  include  one-sixth  of  the  half-yearly  fixed  interest 


256 


CORPORATE  BOND  ISSUES 


charge.  As  an  offset  to  each  monthly  interest  apportion- 
ment, a  corresponding  credit  is  set  up  to  "Accrued  Bond 
Interest,"  or  "Accrued  Interest  Coupons,"  or  "Accrued 
Bond  Coupons,"  or  some  other  account  that  will  clearly 
designate  the  interest  obligation.  Such  entries  are  made 
through  the  journal.  For  example,  referring  to  the 
previous  illustration,  if  the  half-yearly  bond  interest  of 
$25,000  is  to  be  accrued  in  monthly  proportions,  an  entry 
is  required  at  the  end  of  each  month  as  follows: 

January  31,  1916 

Bond  Interest $4,166.67 

To  Bond  Interest  Accrued $4,166.67 

Accrual  of  interest  on  $1,000,000  of  5% 
bonds  for  month  of  January. 

A  similar  entry  should  be  made  at  the  end  of  each 
succeeding  month.  A  like  entry  is  necessary  for  registered 
bond  interest,  and  for  interest  on  any  other  bond  or 
mortgage  obligation,  and  even  for  interest  accruals  on 
current  liabilities.  Monthly  entries  are  necessary  also  for 
interest  accruing  on  investments  and  receivables,  especially 
when  monthly  statements  are  required. 

At  the  end  of  each  six  months  the  bond  interest  is 
paid,  Cash  being  credited,  and  the  "Bond  Interest  Ac- 
crued" account  closed  by  the  corresponding  debit;  but 
whether  or  not  the  "Bond  Interest"  account  is  closed  at 
the  same  time  depends  on  the  closing  dates  adopted  by 
the  company.  As  a  rule,  it  remains  open  until  the  end  of 
the  fiscal  year,  though  at  any  time  during  the  year  it 
shows  the  cumulative  total  for  all  of  the  months  as  well 
as  the  interest  for  each  month.  Sometimes  the  ledger 
accounts  are  closed  monthly,  in  which  case  the  Bond 
Interest  account  is  closed  into  Profit  and  Loss  twelve 
times  a  year. 


BOND  INTEREST  257 

§  229.    Interest  on  Two  or  More  Bond  Issues 

Definite  examples  of  entries  to  fit  all  bond  interest 
conditions  cannot  well  be  given.  Those  already  given, 
with  those  which  follow,  illustrate  their  general  character 
and  are  in  accordance  with  the  entries  employed  by  many 
of  the  larger  corporations.  Each  entry  must  indicate  for 
what  purpose  it  was  made  and  the  conditions  involved. 
Monthly  entries  are  made  for  accruing  bond  interest  on 
the  various  bond  issues  and  for  the  several  series  of  any 
particular  issue.  An  account  is  opened  for  each  separate 
obligation  as  a  rule,  and  sometimes  for  each  part  issue 
thereof. 

As  a  basis  for  the  entries  which  follow,  assume  that 
January  i,  19 16,  first  mortgage  5%  bonds  are  issued  for 
$2,000,000,  interest  payable  April  i  and  October  i;  also 
first  and  refunding  6%  mortgage  gold  bonds  for  $4,000,- 
000,  interest  payable  January  i  and  July  i.  At  the  end 
of  June,  the  following  entry  is  necessary  to  record  the 
interest  accruals  for  the  month,  similar  entries  having  been 
made  for  the  intervening  months. 

June  30,  1916 

Interest  on  Funded  Debt $28,333.34 

To  Accrued  Interest  on  Bonds $28,333.34 

Monthly  interest  accrual  on  outstanding 
bonds  as  follows: 

Bonds  Accrued 

Outstanding     Interest 
First  mortgage 

5%  bonds... $2,000,000.00    $8,333.34 
First    and    re- 
funding  6% 
bonds 4,000,000.00    20,000,00 


$6,000,000.00  $28,333.34 
When  several  series  of  bonds  are  outstanding,  it  may 


258  CORPORATE  BOND  ISSUES 

be  advisable  to  open  an  interest  account  for  each  series, 
as  "Accrued  Interest  on  Bonds — Series  A,"  "Accrued 
Interest  on  Bonds — Series  B,"  etc.  Of  course,  in  a  book- 
keeping system  where  the  voucher  is  in  use,  a  journal 
voucher  would  be  made  out  for  the  above  entry,  giving 
full  details  respecting  the  interest  applications,  as  "Ac- 
crued Interest  on  First  Mortgage  5%  Bonds,"  and 
"Accrued  Interest  on  First  and  Refunding  6%  Mortgage 
Bonds." 

Since  the  coupons  of  the  first  and  refunding  mortgage 
6%  bonds  are  now  due,  an  entry  is  made  setting  up  the 
liability  for  the  particular  coupon  and  closing  off  the 
portion  of  interest  accrued  to  date,  thus: 

June  30,  19 1 6 

Accrued  Interest  on  Bonds $120,000 

To  Bond   Coupon   No.  9,  Due  July   i, 

1916  (A  Co.  6's) $120,000 

For  six  months'  interest  due  July  i,  1916, 
on  $4,000,000  of  first  and  refunding  6% 
gold  bonds. 

An  entry  similar  to  the  above  is  required  each  time 
the  coupons  on  any  particular  bond  issue  fall  due.  At 
the  same  time  a  check  is  issued  to  the  financial  agent  for 
redemption  of  the  coupons  No.  9  as  they  mature.  The 
entry  is: 

The  Globe  Trust  Company,  Trustee $120,000 

To  Audited  Vouchers  (or  Cash) $120,000 

For  payment  of  six  months'  interest  due 
July  I,  1916,  on  $4,000,000,  etc. 

It  will  be  seen  now  that  all  No.  9  coupons  are  standing 
on  the  ledger  as  a  liability  and  so  remain  until  paid,  no 
matter  how  long  that  may  be;  also  that  there  is  a  cor- 
responding charge  to  the  trustee  for  an  equivalent  amount. 


BOND  INTEREST  259 

The  trustee  renders  a  report  at  the  end  of  each  month, 
setting  forth  the  amount  and  number  of  coupons  paid  to 
date,  all  of  which  are  turned  over  to  the  company  for 
cancellation.  At  that  time  an  entry  is  made  for  as  many 
coupons  as  may  have  been  paid.  For  illustration  we  will 
assume  that  $84,800  of  the  above  amount  has  been  pre- 
sented and  paid,  requiring  this  entry: 

July  31,  1916 

Bond  Coupon  No.  9,  Due  7/1/16  (A  Co.  6's) $84,800 

To  The  Globe  Trust  Company,  Trustee. . .  $84,800 

For  interest  coupons  paid  by  The  Globe  Trust 
Company,  Trustee,  during  the  month  of 
July,  1916,  as  per  statement  rendered. 

If  more  than  one  class  of  coupons  were  paid,  they 
would  also  be  debited  in  like  manner.  For  the  first 
mortgage  5%  bonds,  similar  entries  are  required  at  the 
end  of  September.  At  the  end  of  the  fiscal  year  or  half- 
year,  the  account  for  the  interest  on  bonds  must,  of 
course,  be  closed  into  Profit  and  Loss.  At  that  time 
Bond  Interest  accounts  for  any  and  all  issues  or  series, 
whether  accrued  for  the  full  year,  or  only  for  one  month, 
must  be  closed  off. 

§  230.    Interest  on  Treasury  Bonds 

Treasury  bonds  (see  §  176),  for  the  present  considera- 
tion, are  understood  to  comprise  the  issuing  company's 
own  bonds  which  have  been  acquired  by  purchase  or 
donation.  This  ownership,  so  long  as  the  bonds  have  not 
been  cancelled,  makes  no  difference  in  the  manner  of 
handling  or  accruing  bond  interest  payable.  The  monthly 
accruals  are  set  up  as  usual,  and  the  interest  check  handed 
over  to  the  paying  bank  at  the  proper  date,  while  the 
bank  in  turn  cashes  the  bond  coupons  presented  for  pay- 


26o  CORPORATE  BOND   ISSUES 

ment,  regardless  of  ownership  or  of  the  sources  from 
whence  they  come.  The  issuing  company,  on  the  other 
hand,  treats  the  treasury  bonds  as  investments,  the  same 
as  bonds  of  other  companies,  and  collects  the  income 
therefrom  in  like  manner.  In  case  monthly  accruals  of 
$10,000  income  from  treasury  bonds  and  other  invest- 
ments are  required  to  be  set  up,  an  entry  should  be  made 
at  the  end  of  each  month  about  as  follows: 

January  31,  1916 

Accrued  Income  from  Investments $10,000 

To  Income  from  Investments $10,000 

For  accrued  income  on  investments  for  one 
month,  as  follows:  (Recite  the  amount,  rate, 
etc.) 

If  it  is  desired  that  the  income  from  treasury  bonds 
be  kept  separate  from  that  of  other  investments,  debit 
Accrued  Income  from  Treasury  Bonds  and  credit  Income 
from  Treasury  Bonds. 

As  the  cash  is  received  in  payment  the  following  cash 
book  entry  is  required  on  the  due  date: 

July  I,  1916 

Cash $60,000 

To  Accrued  Income  from  Investments ....  $60,000 

For  cash  income  on  investments  due  today  as 
follows:   (Recite  details  of  investments.) 

At  the  end  of  each  fiscal  period  the  Income  from 
Investments  account  is  closed  to  Profit  and  Loss  as 
follows: 

December  31,  1916 

Income  from  Investments $120,000 

To  Profit  and  Loss  (or  Income) $120,000 

To  close  into  Profit  and  Loss,  being  total 
income  for  the  year  from  investments. 


BOND   INTEREST  261 

If  income  is  derived  from  several  disconnected  sources, 
it  might  be  advisable  to  open  separate  accounts  to  dis- 
tinguish them  from  one  another,  as  Income  from  Bonds, 
Income  from  Real  Estate  Investments,  Income  from 
Dividends,  etc. 

§  231.    Interest  on  Guaranteed  Bonds 

Interest  payments  on  guaranteed  bonds  are  handled 
in  the  same  manner  as  those  of  any  other  class  of  bonds. 
The  issuing  company  pays  the  interest  in  the  usual  way 
if  it  is  able.  In  case  it  is  unable  to  do  so,  the  guaranteeing 
company  must  make  the  payment,  which  must  obviously 
be  considered  an  advance  to  the  subsidiary  company,  to 
be  repaid  at  some  future  date.  At  the  time  of  the  advance, 
a  cash  book  entry  should  be  made  as  follows: 

Advances  to  Subsidiary  Company  (giving  name 

of  company) $25,000 

To  Cash $25,000 

For  payment  of  interest  due  this  day  on  $1,- 
000,000  of  guaranteed  5%  bonds  of  The 
Company. 

On  the  books  of  the  issuing  company  the  following 
entry  is  required: 

Bond  Interest  (or  Bond  Interest  Accrued) $25,000 

To  Advances  from Company  $25,000 

(Full  explanation  here.) 

The  entries  may,  of  course,  be  very  different  from  those 
shown,  depending  upon  the  agreement  existing  between 
the  two  companies;  but  in  any  case  the  matter  should 
be  clearly  set  forth  in  each  company's  books. 

§  232.    Interest  on  Income  Bonds 

Since  income  bonds  are  to  all  intents  and  purposes 


262  CORPORATE   BOND   ISSUES 

the  same  as  preferred  stock,  it  is  manifest  that  the  book 
entries  for  the  interest  thereon  would  be  practically  the 
same  as  those  required  for  dividends  when  declared.  As 
in  the  case  of  stock,  interest  on  income  bonds  can  be  paid 
only  when  the  company's  profits  are  sufficient  to  justify 
such  payment;  therefore,  as  a  rule  no  entry  is  necessary 
or  advisable  until  the  directors  decide  whether  or  not  it 
shall  be  paid.  On  the  other  hand,  when  it  is  practically 
assured  that  the  interest  coupons  will  be  paid,  monthly 
entries  for  accruing  interest  are  in  order.  Income  bonds 
generally  contain  half-yearly  coupons,  though  their  pay- 
ment, of  course,  is  contingent  upon  the  company's 
earnings.  When  declared  at  the  interest  date  the  follow- 
ing entry  is  made: 

December  31,  1916 

Interest  on  Income  Bonds $25,000 

To  Interest  Payable  on  Income  Bonds $25,000 

For  interest  at  5%  on  income  bonds  for  six 
months,  declared  by  the  directors  and  pay- 
able January  i,  1917. 

The  Interest  account  is  closed  into  Profit  and  Loss. 
Note  that  instead  of  the  word  "interest,"  we  might  use 
the  word  "dividend."  When  the  interest  is  paid,  the  cash 
entry  should  be  as  follows: 

January  i,  1917 

Interest  Payable  on  Income  Bonds $25,000 

To  Cash $25,000 

For  payment  of  interest  on  income  bonds. 

§  233.    Interest  on  Special  Bond  Issues 

The  principles  already  stated  for  the  entry  of  bond 
interest  apply  in  handling  the  interest  on  all  other  bond 
issues   where   registered    and   coupon    bonds    are   used, 


BOND  INTEREST 


263 


whether  secured  or  otherwise.  Profit-sharing  or  par- 
ticipating bonds  require  extra  entries  for  setting  aside'  the 
share  of  profits  apportioned  to  them,  which  in  turn  would 
be  paid  by  check  or  otherwise,  as  the  case  might  be. 

§  234.    Interest  Charged  to  Construction 

The  Interstate  Commerce  Commission  and  the  various 
state  public  utility  commissions  permit  the  capitalization 
of  various  charges  during  periods  of  construction.  This 
principle  might  apply  equally  as  well  to  corporations  not 
under  commission  regulation,  so  long  as  the  charges  capi- 
talized are  actual  and  legitimate  and  expended  during 
the  construction  of  plant,  or  extension  of  property  and 
equipment.  Real  estate  development  companies  and  other 
similar  enterprises  generally  include  certain  "loading" 
charges  as  part  of  the  development  or  construction  cost. 
Such  charges  may  include  development  expenses,  interest 
on  bonds  and  loans,  legal  and  other  direct  expenditures, 
proportion  of  bond  discount,  etc.  These  items  are  usually 
charged  to  the  appropriate  accounts;  and  then  at  the  end 
of  the  year,  or  upon  completion  of  the  construction,  a 
transfer  entry  is  made  to  place  them  in  the  Construction 
account — or  to  such  other  account  as  may  be  proper. 

The  following  entry  shows  the  manner  in  which  such 
transfers  should  be  made: 

December  31,  1916 
Construction  Account  (or  Plant  and  Equipment)  $42,000 

To  Construction  Expenses $20,000 

"    Bond  Interest 10,000 

"    Loan   Interest 4.000 

"    Bond  Discount 8,000 

To  close  above  accounts  into  Construction  ac- 
count, being  all  of  the  construction  expenses 
and  interest,  and  the  proportionate  amount 
of  the  bond  discount  for  the  period. 


264 


CORPORATE  BOND   ISSUES 


Many  corporation  officials  advocate  the  addition  of 
all  bond  discount  and  expense  to  plant  account,  especially 
if  the  bond  issue  was  created  for  extension  of  the  plant; 
but  this  is  not  good  practice,  since  the  manufacturing 
account  through  depreciation  charges  would  eventually 
be  made  to  bear  a  considerable  portion  of  the  expense  of 
financing  the  company. 

§  235.    Income  from  Investments 

Income  from  investments  other  than  treasury  bonds 
is  handled  in  the  same  manner  as  explained  above.  Divi- 
dends from  stock  investments,  however,  should  not  be 
entered  as  accrued  monthly  income,  or  entered  in  any 
other  way  until  the  dividend  has  actually  been  declared. 

A  plan  of  entering  income  from  investments  that 
differs  slightly  from  the  one  suggested  under  "Interest 
on  Treasury  Bonds"  is  given  below.  Assume  that  Com- 
pany A  owns  $1,000,000  of  Company  B's  6%  bonds, 
payable  January  i  and  July  i.  At  the  end  of  each  month 
the  following  entry  should  be  made  on  Company  A's 
books  for  the  accrued  income: 

January  31,  1916 

Accrued  Interest  on  Bonds  Owned $5,000 

To  Interest  on  Bonds  Owned $5,ooo 

(Full  explanation  here.) 

At  the  regular  interest  dates,  July  i  and  January  i, 
or  in  fact  the  day  preceding,  the  following  entry  should 
be  made: 

June  30,  1916 

Company  B $30,000 

To  Accrued  Interest  on  Bonds  Owned ....  $30,000 

(Full  explanation  here.) 


BOND  INTEREST 


265 


When  the  bond  coupons  are  presented  to  the  paying 
bank  and  the  cash  received  therefor,  the  following  entry 
is  required: 

July  I,  1916 

Cash $30,000 

To  Company  B $30,000 

(Full  explanation  here.) 

It  is  apparent,  of  course,  that  this  could  be  handled  very 
differently  so  long  as  it  records  the  matter  adequately  and 
clearly.  The  debit  in  the  first  entry  might  be  to  Accrued 
Interest  Receivable  or  Accrued  Interest  on  Bonds  Receiv- 
able. The  second  and  third  entries  could  be  consolidated 
into  one,  debiting  Cash  and  crediting  Accrued  Interest  on 
Bonds  Owned. 


CHAPTER   XIX 

BOND  DISCOUNT  AND  PREMIUM 

§  236.    Bonds  Sold  Above  or  Below  Par 

When  bonds  are  sold,  the  standing-  of  the  issuing  com- 
pany and  its  ability  to  pay  all  obligations  at  maturity  have, 
of  course,  a  direct  and  important  bearing  on  the  price 
secured.  A  strong,  well-managed  corporation  may  be  able 
to  sell  a  43^%  or  5%  bond  near  to  or  above  par,  while 
another  company  not  so  well  known  or  not  so  strong  finan- 
cially may  be  unable  to  sell  a  6%  bond  save  at  a  considerable 
discount. 

For  instance,  the  issue  of  $49,000,000  consolidated 
mortgage  4^2%  gold  bonds  of  the  Pennsylvania  Railroad 
Company,  dated  February  i,  19 15,  due  in  i960,  was  offered 
through  a  prominent  banking  house  of  New  York  and 
promptly  taken  up  at  103^  and  over,  and  accrued  interest 
to  date  of  delivery.  At  this  price  the  investor  got  but  little 
over  45^  %  on  his  investment,  but  the  undoubted  stability  of 
the  company,  its  careful  management,  and  the  ready  market 
for  the  bonds  in  case  the  investor  should  wish  to  sell,  made 
them  very  attractive.  Also,  the  fact  that  these  bonds  were 
a  legal  investment  for  savings  banks  in  several  states,  and, 
by  agreement  of  the  company,  free  from  taxation  under 
present  or  future  laws  of  the  State  of  Pennsylvania  or  of 
the  United  States,  added  to  their  desirability. 

On  the  other  hand,  April  i,  191 6,  the  Chesapeake  and 
Ohio  Railway  Company  issued  $40,180,000  of  5%   con- 

266 


BOND  DISCOUNT  AND   PREMIUM 


267 


vertible  thirty-year  secured  gold  bonds,  carrying  many  de- 
sirable features.  These  were  debenture  bonds  offered  also 
through  a  strong  New  York  banking  concern,  but  they  sold 
at  approximately  95  with  interest  to  date  of  sale. 

In  both  of  these  cases  the  bankers  through  whom  the 
bonds  were  sold  were  of  undoubted  strength,  and  the  dif- 
ference in  price  clearly  reflected  the  relative  desirability  of 
the  bonds  from  the  standpoint  of  the  investor.  In  the  case 
of  the  Pennsylvania  bonds,  every  desirable  feature  was 
present.  In  the  case  of  the  Chesapeake  and  Ohio  bonds,  the 
preceding  financial  history  of  the  road  had  an  adverse  in- 
fluence and  the  general  conditions  under  which  the  bonds 
were  issued  were  not  as  satisfactory  as  in  the  case  of  the 
Pennsylvania  bonds.  As  a  result,  the  Pennsylvania  bonds 
sold  at  a  premium  of  3^%  and  over,  and  the  Chesapeake 
and  Ohio  bonds  at  a  discount  of  approximately  5%. 

§  237.    Bonds  Sold  Between  Interest  Dates 

When  bonds  are  sold  at  other  than  the  regular  interest 
dates,  allowances  must,  of  course,  be  made  for  accrued 
interest  in  determining  the  price  actually  received  for  the 
bonds.  For  instance,  a  bond  bearing  interest  at  the  rate  of 
6%  per  annum,  payable  semiannually,  January  i  and  July  i, 
must  receive  its  3%  on  the  interest  date  regardless  of  when 
it  was  sold.  If,  then,  such  a  bond  were  sold  March  i,  interest 
has  accrued  to  the  amount  of  1%,  and  this  must  be  deducted 
from  the  amount  received  to  determine  the  real  price  of  the 
bond.  If  the  amount  received  for  the  bond  were  103,  it  is 
obvious  that  1%  on  the  face  of  the  bond  must  be  allowed 
for  the  accrued  interest,  and  this  being  deducted  leaves  102 
as  the  price  actually  received  for  the  bond. 

If  the  bond  were  sold  for  100,  there  would  obviously  be 
a  discount  of  i  %  on  the  transaction,  the  actual  price  of  the 
bond  being  99. 


268  CORPORATE  BOND  ISSUES 

§  238.    Expenses  of  Bond  Issue 

Many  authorities  consider  the  expenses  incurred  in  the 
floating  of  a  bond  issue  as  directly  chargeable  to  the  cost  of 
the  issue,  in  the  same  manner  as  discount  on  the  bonds.  The 
Public  Service  Commission  of  the  First  District  of  New 
York  includes  among  such  expenses  the  following:  "All 
expenses  connected  with  the  issue  and  sale  of  evidences  of 
debt,  such  as  fees  for  drafting  mortgages  and  trust  deeds, 
fees  and  taxes  for  recording  mortgages  and  trust  deeds, 
cost  of  engraving  and  printing  bonds,  fees  paid  trustees 
provided  for  in  the  mortgages  and  trust  deeds,  fees  and 
commissions  paid  underwriters  and  brokers  for  marketing 
such  evidences  of  debt,  and  other  regular  expenses.'* 

§  239.     Entries  for  Bond  Discount  and  Expense 

To  illustrate  the  disposition  to  be  made  of  discount  on 
bonds  and  the  other  expense  inevitable  in  connection  with 
a  bond  issue,  we  will  assume  that  the  bond  issue  of 
$1,000,000  of  the  Lenox  Iron  Works  was  sold  for  cash  at 
90  flat,  and  that  expenses  incurred  in  connection  with  the 
issue  amounted  to  $5,000.  The  bond  discount  may  be 
charged  under  "Discount  on  Bonds"  or  some  other  suitable 
title,  and  the  expense,  to  "Expense  of  Bond  Issue" ;  or  both 
the  discount  and  expense  may  be  charged  to  one  account,  as 
"Bond  Discount  and  Expense."    The  entry  for  the  sale  is : 

January  I,  1916 

Cash $900,000 

Bond  Discount  and  Expense 100,000 

To  Unissued  First  Mortgage  Bonds. ..  $1,000,000 

For   entire   issue   of   first   mortgage   5% 
bonds  sold  to  bankers  at  90. 

Bond  Discount  and  Expense $5,000 

To  Cash $5,000 

For  bond  issue  expenses  paid  in  cash. 


BOND  DISCOUNT  AND  PREMIUM  269 

§  240.    Entries  for  Bond  Premium 

Premium  received  on  the  sale  of  bonds  is  credited  to  a 
distinguishing  account,  as  "Premium  on  Bonds,"  "Bond 
Premium,"  or  "Premium  and  Discount  on  Bonds."  As- 
suming that  the  issue  of  $1,000,000  bonds  of  the  Lenox 
Iron  Works  sold  at  a  premium  of  2%,  the  following  entry 
would  be  made : 

January  I,  191 6 

Cash $1,020,000 

To  Unissued  First  Mortgage  Bonds. .  $1,000,000 

"   Premium  on  Bonds 20,000 

(Full  explanation  here.) 

§  241.    Nature  of  Bond  Premium  and  Discount 

The  entries  required  to  bring  bond  premium  or  bond 
discount  upon  the  books  are  simple.  After  they  are  brought 
upon  the  books,  their  proper  treatment  is  a  more  difficult 
problem. 

The  premium  or  discount  which  is  either  received  or 
given  upon  the  sale  of  the  bonds  may  be  said  to  represent 
a  deduction  from,  or  an  addition  to,  the  interest  paid  on  the 
bonds.  In  other  words,  "Premium  or  discount  on  bonds  is  a 
deduction  from,  or  addition  to,  the  nominal  rate  of  interest 
which  the  bond  carries ;  that  is  to  say,  there  is  a  rate  known 
as  the  true  or  effective  rate,  at  which  any  corporation  can 
place  its  bonds  at  par;  if  it  elects  to  place  them  at  any  other 
rate,  the  bonds  will  sell  at  a  premium  or  discount  as  the  case 
may  be;  but  the  effective  rate  remains  the  same  and  this 
effective  rate  is  the  proper  charge  to  Income  account. 
Hence,  the  premium  or  discount  should  theoretically  be 
spread  over  the  term  of  the  bonds,  and  the  annual  instalment 
thereof  credited  or  charged  to  the  Income  account  each 
year."* 


"Accounting  Practice  and  Procedure"  by  A.  Lowes  Dickinson,  page  134- 


270 


CORPORATE  BOND  ISSUES 


§  242.    Treatment  of  Bond  Premium  and  Discount 

As  already  stated,  bond  premium  or  discount  is  from  its 
very  nature  a  deduction  from,  or  an  addition  to,  the  cost  of 
the  funds  raised  by  the  issue.  It  therefore  really  decreases 
or  increases  the  amount  of  nominal  interest  paid  during  the 
life  of  the  bonds. 

In  order  that  each  accounting  period  may  show  accu- 
rately the  true  cost  of  carrying  the  issue,  the  premium  or 
discount  must  be  written  off  over  the  life  of  the  bonds  and 
credited  or  charged  periodically  to  the  interest  account  and 
through  this  to  Profit  and  Loss. 

Some  organizations  with  a  large  surplus  make  a  practice 
of  writing  off  the  Bond  Discount  and  Expense  account  im- 
mediately, but  this  does  not  show  the  true  cost  of  carrying 
the  issue  and  is  therefore  misleading.  Other  organizations 
write  off  the  discount  in  several  instalments,  but  this  is  not 
accurate  and  is  as  objectionable  as  the  practice  of  charging 
it  off  immediately. 

Bond  premium  is,  much  more  frequently  than  discount, 
thrown  immediately  into  the  profit  and  loss  or  surplus 
accounts.  This  practice  is,  of  course,  just  as  misleading  as 
the  same  method  of  handling  a  discount  would  be,  for  it  will 
result  in  an  erroneous  statement  of  the  operating  costs. 

§  243.    Effective  Rate  Method 

The  best  modern  practice  of  handling  either  bond  prem- 
ium or  discount  is  that  known  as  the  effective  rate  method, 
this  effective  rate  being  figured  on  the  amount  actually 
received  for  the  bond,  and  not  on  its  par.  Under  this 
method  the  effective  rate  which  the  issue  bears  is  charged 
against  Income  as  the  Accrued  Interest  account  is  set  up. 
In  the  case  of  discount,  the  effective  rate  is  debited  to  the 
Interest  account  and  the  nominal  rate  credited  to  Accrued 
Interest,   while   the  difference   between   the   nominal   and 


BOND  DISCOUNT  AND  PREMIUM 


271 


effective  rates  is  credited  to  Bond  Discount  and  Expense. 
In  the  case  of  premium,  the  difference  between  the  effective 
and  nominal  rates  is  debited  to  the  Premium  account. 

To  illustrate  the  handling  of  premium  or  discount 
accounts  on  the  books  under  the  effective  rate  method,  let 
us  assume  that  the  $1,000,000  issue  of  the  Lenox  Iron 
Works  which  sold  at  90  flat,  and  the  expenses  of  which  were 
$5,000,  runs  for  twenty  years  and  bears  interest  at  the  rate 
of  5%  per  annum,  payable  annually.  The  total  of  the  Dis- 
count and  Expense  account  shows  $105,000  that  must  be 
written  off  over  the  life  of  the  bonds.  Instead  of  the  nomi- 
nal rate  of  5%,  or  $50,000,  which  the  issue  carries,  the 
true  or  effective  rate  would  be  6.139%  or  $55,250.  At  the 
end  of  the  first  year,  if  monthly  entries  are  not  made,  the 
entries  recording  this  would  be  : 

Interest  on  Bonds $50,000 

To  Accrued  Interest $50,000 

Interest   accrued  on   the   issue   of   $1,000,000 
first  mortgage  5%  bonds. 

Interest  on  Bonds $5,250 

To  Bond  Discount  and  Expense $5,250 

Difference  between  the  nominal  and  true  effec- 
tive rates  on  the  $1,000,000  bond  issue. 

Accrued  Interest  on  Bonds $50,000 

To  Cash $50,000 

Payment   on   accrued    interest   on   $1,000,000 
bond  issue. 

The  interest  is  eventually  closed  into  Profit  and  Loss  by 
the  following  entry : 

Profit  and  Loss $55,250 

To  Interest  on  Bonds $55,250 

Transfer  of  the  effective  interest  on  $1,000,000 
bond  issue  to  Profit  and  Loss. 


2.^2 


CORPORATE  BOND  ISSUES 


The  entries  for  bond  premium  would,  of  course,  be  of 
the  same  general  nature,  the  effective  rate,  however,  being 
less  than  the  nominal  or  accrued  interest  charged. 

Where  the  bonds  are  to  be  redeemed  at  maturity  at  par, 
the  problem  of  writing  off  the  interest  or  discount  is,  as  has 
just  been  shown,  comparatively  simple ;  but  where  they  are 
to  be  redeemed  at  prices  other  than  par,  and  at  varying  dates 
of  maturity,  the  problem  is  much  more  complicated.  The 
whole  matter  is  summed  up  admirably  in  the  quotation  given 
below.* 

§  244.    Varying  Conditions  Affecting  Annual  Charge 

"In  accounting  for  the  charge  to  income  where  the  ef- 
fective interest  method  is  adopted,  these  cases  must  be 
considered : 

"(a)  Bonds  issued  at  a  discount  and  redeemable  at  par. 
When  the  bonds  are  first  issued  the  full  par  value  would  be 
credited  to  the  liability  account,  while  the  difference  between 
this  full  value  and  the  cash  received  would  be  charged  to  a 
discount  on  bonds  account.  The  full  effective  rate  of  inter- 
est would  be  charged  to  Income  account,  while  so  much  of 
it  as  represents  the  nominal  interest  would  be  credited  to 
Interest  Accrued,  and  the  balance  to  Bond  Discount,  thus 
gradually  reducing  this  account  over  the  life  of  the  bonds. 

"(b)  Bonds  issued  at  a  premium  and  redeemable  at  par. 
The  conditions  are  exactly  the  reverse  of  case  (a).  Dis- 
count on  Bonds  account  will  become  Premium  on  Bonds 
account  with  a  credit  balance;  the  effective  interest  charge 
will  be  less  than  the  actual,  leaving  a  charge  to  Bond  Pre- 
mium account  in  reduction  of  the  balance  on  that  account. 

"(c)  Bonds  issued  at  par,  redeemable  at  a  premium. 
This  case  is  in  substance  identical  with  (a),  but  in  practice 


•By  permission,  from  "Accounting  Practice  and  Procedure"  by  A.  Lowes  Dick 
son,  pages  135-141- 


BOND  DISCOUNT  AND  PREMIUM  273 

the  treatment  is  different,  as  there  is  neither  discount  nor 
premium  at  the  date  of  issue.  The  charge  to  Income  ac- 
count will  exceed  the  interest  accrued,  and  the  difference 
will  be  credited  to  Bond  Premium  account  and  accumulated 
there  until  final  redemption,  all  premiums  paid  on  redeemed 
bonds  being  charged  to  this  account. 

*'(d)  Bonds  issued  at  a  discount  and  redeemable  at  a 
premium.  This  combines  cases  (a)  and  (c).  The  excess 
of  the  effective  rate  will  be  credited  to  Premium  and  Dis- 
count account,  and  will  gradually  convert  the  debit  balance 
on  that  account  into  a  credit  sufficient  to  equal  the  amount 
of  all  premiums  payable  on  final  redemption. 

"In  practice  it  is  often  found  that  bonds  are  purchased 
in  the  market  at  prices  varying  from,  and  generally  less 
than,  the  specified  redemption  prices,  and  then  transferred 
to  the  trustees  of  the  sinking  fund  at  the  specified  prices, 
and  a  saving  thus  effected  which  must  be  taken  into  account 
when  determining  the  annual  charge  to  income.  Or,  again, 
the  redemption  dates  may  be  anticipated  for  a  whole  or  part 
of  the  issue,  and  further  disturbing  factors  thus  introduced. 

"The  saving  on  the  purchase  of  bonds  in  the  market  at 
prices  below  those  fixed  for  redemption,  may  be  dealt  with 
in  one  or  the  other  of  the  following  methods : 

1.  Credit  the  amount  to  Income  account  each  year, 

thus  finally  disposing  of  it. 

2.  Credit  the  amount  to  Discount  (or  Premium)  on 

Bonds  account,  thus  eventually  producing  a  sur- 
plus on  this  account,  which  would  ultimately  be 
transferred  to  Income  account. 

"Neither  of  these  methods  is  theoretically  accurate ;  but 
in  view  of  the  impossibility  of  determining  what  the  market 
price  will  be  in  the  future,  theoretical  accuracy  is  impossible. 

"The  treatment  in  the  case  of  anticipation  of  redemption 


274  CORPORATE  BOND  ISSUES 

dates  is  a  more  difficult  matter,  for,  if  carried  out  on  at  all 
a  large  scale  and  not  accompanied  by  an  equitable  reduction 
on  the  redemption  price,  the  effective  interest  rate  will  be 
materially  increased.  The  only  sound  method  would  appear 
to  be  to  recalculate  the  effective  rate  on  the  basis  of  the  bonds 
still  outstanding  and  the  new  redemption  terms.  If  this  is 
not  done,  there  may  be  a  considerable  shortage  to  make  up 
at  the  date  of  final  redemption.  This  fact  is  frequently  over- 
looked, although  it  should  be  recognized  as  an  important 
factor,  particularly  in  any  refunding  or  redemption  plan. 

§  245.    Methods  of  Determining  Charge  to  Income 

"There  are  various  methods  in  use  for  determining  the 
proper  interest  charge  to  be  made  to  Income  account  under 
the  various  conditions  that  arise. 

"The  first  and  most  correct  method,  which  may  be  called 
the  effective  interest  method,  consists  in  charging  to  Income 
account  the  effective  interest  rate  calculated  from  the  known 
conditions  of  issue  upon  the  whole  amount  outstanding 
during  the  year,  with  an  addition  or  deduction  of  an  amount 
equal  to  the  excess  or  deficit  of  the  amount  paid  for  redemp- 
tion during  the  year  as  compared  with  the  fixed  amount 
provided.  For  instance,  if  the  conditions  of  the  issue  pro- 
vided that  $100,000  of  bonds  be  retired  during  the  year  at 
105,  and  as  a  matter  of  fact  they  are  purchased  at  95,  the 
true  interest  on  the  bonds  bearing  interest  during  the  year 
would  be  reduced  by  $10,000,  representing  the  saving  on 
bonds  retired  during  the  year  as  compared  with  the  price 
therefor  assumed  in  determining  the  effective  rate.  The 
tendency  of  this  method  would  probably  be  to  increase 
gradually  the  annual  charge  to  Income  for  interest  and 
sinking  fund  until  the  limit  price  of  redemption  was  reached ; 
for,  as  the  amount  of  the  bonds  outstanding  diminished,  the 
market  price  might  be  expected  to  rise. 


BOND  DISCOUNT  AND   PREMIUM  275 

"The  second  and  more  common  method,  which  may  be 
called  the  equal  instalment  method,  is  to  ignore  altogether 
the  effective  interest  rate ;  to  charge  to  Income  account  each 
year  the  interest  actually  paid,  together  with  a  proportionate 
part,  according  to  the  whole  term  of  issue,  of  the  discount 
on  issue  or  premium  on  redemption ;  Income  account  being 
also  credited  with  any  savings  made  by  purchase  of  bonds  in 
the  market. 

"A  third  method,  which  may  be  called  the  bonds  out- 
standing method,  and  which  may  be  safely  adopted  where, 
by  reason  of  complication  in  the  terms  of  issue  and  redemp- 
tion, it  is  difficult  or  impracticable  to  determine  the  true 
interest  rate,  is  to  distribute  the  discount  or  premium  over 
the  period  in  the  proportion  that  the  bonds  outstanding  for 
each  year  bear  to  the  sum  of  the  bonds  outstanding  for 
all  years  of  the  currency  of  the  loan.  Any  saving  made  by 
the  purchase  of  bonds  in  the  market  is  credited  to  Income 
account. 

"When  a  large  accumulated  surplus  is  available,  the 
practice  is  frequently  adopted  of  charging  the  whole  dis- 
count on  issue  to  Profit  and  Loss  account,  taking  up  any 
profit  or  loss  on  subsequent  redemption  at  a  discount  or 
premium  to  the  credit  of  Profit  and  Loss  account  as  it  arises, 
and  leaving  the  nominal  interest  of  the  bonds  actually  out- 
standing each  year  as  the  only  charge  to  Income  account.  A 
great  objection  to  this  practice  is  that  thereby  the  true  rate 
of  interest  paid  on  loans  during  their  currency  is  entirely 
lost  sight  of;  current  fixed  charges  against  earnings  are 
understated;  and  the  portion  representing  the  discount  is 
charged  against  surplus  arising  out  of  previous  operations, 
instead  of  being  charged  against  income  from  current 
operations  which  should  meet  it.  Any  savings  on  bonds 
which  are  purchased  in  the  market  are  a  credit  to  Income 
account. 


276  CORPORATE  BOND  ISSUES 

§  246.  Operation  of  the  Various  Methods  of  Determining 
Annual  Charge  to  Income 

"In  order  to  show  the  effect  of  these  various  methods, 
it  may  be  well  to  consider  a  specific  case  as  follows : 

"An  issue  of  $1,000,000  of  bonds  is  made  at  90,  carrying 
interest  at  5%,  and  redeemable  at  the  rate  of  $50,000  each 
half  year,  at  100  for  the  first  five  years,  and  thereafter  at 
105.  Calculations  made  on  these  premises  show  that  the 
effective  rate  of  interest  is  approximately  8  3/16%.  Bonds 
are  redeemed  each  as  specified,  but  they  are  purchased  in 
the  market  at  the  following  prices,  viz. : 

1st  year ,. .  92 

2nd  year 93 

3rd  year 95 

4th  year 97 

5th  year 98 

6th  year 100 

7th  year 102 

8th  year 104 

9th  and  loth  drawn  at 105 

"The  tables  that  follow  give  all  the  essential  figures. 

"In  the  table  on  page  277,  the  last  four  columns  show 
the  charges  to  Income  account  on  the  basis  (5)  of  the  effec- 
tive interest  method;  (6)  of  the  equal  instalment  method; 
(7)  of  the  bonds  outstanding  method;  and  (8)  of  charging 
all  discount  and  premium  to  surplus ;  in  each  case  crediting 
to  Income  account  the  surplus  arising  from  purchasing 
bonds  at  less  than  the  fixed  redemption  price. 

"If  the  latter  be  credited  direct  to  surplus,  or  carried  in 
the  Bond  Discount  account  until  all  discount  has  been  writ- 
ten off  by  the  operation  of  these  credits  and  the  balance  of 
the  effective  rate,  then,  at  the  end  of  the  nth  half  year  in 
the  first  case  and  at  the  end  of  the  15th  half  year  in  the 


BOND   DISCOUNT  AND   PREMIUM 


277 


Charge  to  Income 
when  Discount 
charged  to  Profit 
and  Loss  Ac- 
count 


Charge  to  Income 
when  Discount 
written  off  on 
Bonds  outstand- 
ing method 


Charge  to  Income 
on  equal  annual 
Instalment 
Method 


Charge  to  Income 
on  eflfective  in- 
terest method 


Surplus  on  p  u  r  - 
chase  at  less  than 
redemption 
price 


Discount  provided 
for  (2)  —  (1) 


Effective  Interest 
charge  at  8  3/16% 
p.  a.  (b) 


Payments  for  In- 
terest at  5%  p. 
a.  (a) 


Period  J4  Year 


88888888888888888888 


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t>.  Lo  COM  Ooco-^PiOooo  incO"-.  O.  <>iotO'-:^3 

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88888888888888888888 


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M  N  fO  Tl*  m>0  txOO  On  O  •-"  <N  fO  '^  lOO  t^OO  Ov  O  ^^ 


"§ 


Pi 

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278 


CORPORATE   BOND   ISSUES 


second,  the  discount  will  be  extinguished  and  thereafter 
only  the  actual  interest  paid,  less  surplus  on  market  pur- 
chases, will  be  charged  to  Income. 


§  247.  Determining  Annual  Charge  When  Proportionate 
Discount  Is  Written  OflF 
"The  charge  to  Income  account  on  the  bonds  outstanding 
method  is  arrived  at  as  shown  in  the  following  table.  It 
is  so  close  to  that  given  by  the  effective  interest  method  that 
for  all  practical  purposes  it  may  safely  be  adopted. 


1 

bo 

B 

•3 

1 

3 

a 
0 

Z  0 

3  *' 

•0 

C  boo 
2  ''W 

0  S  ■« 

u 

a 
3 
0 

eg 

v-i 

*>  a 

C<-i 

3 
0 

B 
< 

c 

V 

B 

>^ 

u 

V 

u 

3 
Pk 

•0 

C 
0  V 

«!S 

c  0 
0 

** 

<JS 

0 

u 

0 

3  ° 

go, 
< 

I 

$1,000,000 

100/1050 

$11,905 

$25,000 

$4,000 

$32,905 

2 

950,000 

95/1050 

11,310 

23.750 

4,000 

31,060 

3 

900,000 

90/1050 

10,714 

22,500 

3.500 

29,714 

4 

850,000 

85/1050 

10,119 

21,250 

3.500 

27,869 

5 

800,000 

80/1050 

9,524 

20,000 

2,500 

27,024 

6 

750,000 

75/1050 

8,929 

18,750 

2,500 

25.179 

7 

700,000 

70/1050 

8,333 

17,500 

1,500 

24.333 

8 

650,000 

65/1050 

7,738 

16,250 

1,500 

22488 

9 

600,000 

60/1050 

7.143 

15,000 

1,000 

21.143 

10 

550,000 

55/1050 

6.548 

13.750 

1,000 

19,298 

II 

500,000 

50/1050 

5.952 

12,500 

2,500 

IS.952 

12 

450,000 

45/1050 

5.357 

11,250 

2,500 

14,107 

13 

400,000 

40/1050 

4.762 

10,000 

1,500 

13,262 

14 

350,000 

35/1050 

4,167 

8,750 

1,500 

11,417 

15 

300,000 

30/1050 

3,571 

7,500 

500 

10,571 

16 

250,000 

25/1050 

2,976 

6,250 

500 

8,726 

17 

200,000 

20/1050 

2,381 

5.000 

7.381 

18 

150,000 

10/1050 

1,786 

3,750 

5.536 

19 

100,000 

10/1050 

1,190 

2,500 

3,690 

20 

50,000 

5/1050 

595 

1,250 

... 

1.845 

$10,500,000 

$125,000 

$262,500 

$34,000 

$353,500 

CHAPTER   XX 

SINKING    FUNDS 

§  248.    Function  of  the  Sinking  Fund 

A  fund  is  always  an  asset.  A  sinking  fund  is  a  reserva- 
tion of  assets,  usually  cash,  set  aside  periodically  for  a 
specified  purpose  and  placed  in  the  hands  of  a  trustee  for 
safe-keeping  until  the  date  arrives  for  its  expenditure  in 
accordance  with  the  purpose  for  which  it  was  created. 

The  sinking  fund  is  resorted  to  as  a  convenient  method 
of  accumulating  funds  for  various  purposes,  as  for  the 
redemption  of  bonds,  the  cancellation  of  a  lease,  the  replace- 
ment of  some  fixed  asset,  as  a  plant  or  a  costly  machine,  or 
the  replacement  of  an  investment  in  some  wasting  property, 
as  oil  wells,  quarries,  or  mines.  When  the  sinking  fund  is 
used  in  connection  with  the  depreciation  of  mines,  it  is 
frequently  spoken  of  as  an  "extinguishment  fund." 

The  most  common  use  of  the  sinking  fund  in  corporation 
affairs  is  for  the  redemption  of  bond  issues,  and  for  this 
reason  the  present  discussion  of  sinking  funds  is  confined 
to  the  fund  for  the  redemption  of  bonds. 

There  are  some  objections  to  the  sinking  fund  as  a 
method  of  accumulating  funds,  since  it  withdraws  and 
holds  at  a  nominal  rate  of  interest  current  cash  that  could 
be  used  more  profitably  in  the  business.  The  fund  at  the 
best  can  hardly  earn  more  than  4%  or  5%,  while  invested 
in  the  business  it  should  be  made  to  earn  10%  or  more. 

The  sinking  fund  must,  of  course,  be  made  to  earn  as 
much  as  possible  during  the  period  of  its  reservation,  and 
to  that  end  it  is  usually  deposited  in  a  savings  bank,  at 

279 


28o  CORPORATE  BOND  ISSUES 

interest,  until  the  opportunity  arises  for  investment  in  high- 
grade  interest-bearing  securities.  The  manner  in  which  the 
sinking  fund  shall  be  invested  is  usually  set  forth  in  the 
trust  deed  or  other  instrument  through  which  the  sinking 
fund  is  brought  into  existence. 

§  249.    Creation  of  the  Sinking  Fund 

The  manner  of  creating  the  sinking  fund  is  usually  set 
forth  in  the  trust  deed.  Some  of  the  various  methods  fol- 
lowed in  the  maintenance  of  sinking  funds  are  as  follows : 

Cash  instalments,  paid  to  the  trustee  half-yearly  or 
yearly,  are  either  deposited  in  savings  banks  or  invested  in 
approved  gilt-edged  securities.  Sometimes  the  trustee  is 
permitted  and  may  even  be  compelled  to  invest  in  bonds  of 
the  issuing  company,  usually  with  definite  instructions  as  to 
whether  the  purchased  bonds  shall  be  cancelled  or  kept 
alive  as  a  sinking  fund  investment.  Frequently  it  is  pro- 
vided that  the  first  payment  to  the  sinking  fund  need  not 
be  made  for  two  or  more  years  after  the  issuance  of  the 
bonds,  so  as  to  give  the  company  time  to  "get  its  breath" 
before  beginning  the  process  of  redemption. 

The  sinking  fund  instalments  may  be  composed  of 
definite  amounts,  as  $20,000,  $50,000,  $100,000,  or  more, 
as  the  case  may  be,  proportioned  to  the  amount  and  time 
of  the  bond  issue;  or  they  may  vary  from  year  to  year, 
being  either  a  given  per  cent  of  the  outstanding  bonds,  or 
a  given  i>er  cent  of  the  gross  business  of  the  company,  or  a 
given  proportion  of  the  gross  profit  or  net  profit. 

In  the  case  of  a  mine  or  quarry  the  instalments  may 
either  be  definite  amounts,  as  stated  above,  or  else  based 
upon  the  output  of  ore — as  12  cents  per  ton  for  every  ton 
of  ore  mined,  10  cents  for  every  square  yard  of  stone 
quarried,  etc. 

In  the  case,  of  timber  companies  the  instalments  may  be 


SINKING  FUNDS  281 

based  upon  the  quantity  of  timber  cut,  being  so  much  on 
every  thousand  feet  of  timber.  With  real  estate  develop- 
ment companies  the  sinking  fund  payments  are  frequently 
governed  by  the  number  of  lots  or  divisions  plotted  or  the 
progress  attained  in  improving  the  property. 

In  this  connection  it  may  be  of  interest  to  review 
some  of  the  sinking  fund  methods  used  by  well-known 
corporations. 

The  first  mortgage  5%  sinking  fund  30-year  gold  bonds 
of  the  Baldwin  Locomotive  Works  contain  the  following 
provisions  respecting  the  sinking  fund : 

"Beginning  with  the  year  19 15  there  will  be  an  annual 
sinking  fund  payment  of  2%  per  annum  on  the  maximum 
amount  of  bonds  which  shall  at  any  time  be  issued.  Bonds 
for  the  sinking  fund  are  to  be  purchased  at  a  price  not 
exceeding  107  1/2%  and  accrued  interest,  or  drawn  by  lot  at 
that  price," 

A  subsidiary  of  the  Erie  Railroad  Company  issued  $6,- 
000,000  of  first  mortgage  6%  sinking  fund  gold  bonds,  and 
the  mortgage  indenture  requires  a  cumulative  sinking  fund 
sufficient  to  retire  at  least  $2,377,000  bonds  before  maturity. 
The  sinking  fund  clause  calls  for  a  deposit  of  $20,000  April 
I,  1916,  and  annually  thereafter,  this  fund  being  applicable 
to  the  purchase  of  the  outstanding  bonds  upon  tenders  by 
bondholders  at  not  exceeding  no  up  to  and  including 
the  year  1920,  and  at  115  thereafter  prior  to  maturity.  If 
not  obtainable  at  these  prices,  bonds  may  be  called  by  lot  at 
corresponding  prices  upon  the  succeeding  first  day  of  July. 
The  redemption  price  stated  is  noticeably  high,  especially 
since  it  is  the  usual  practice  of  railroad  companies  to  issue 
refunding  bonds. 

Article  three  of  the  trust  deed  of  the  United  States  Steel 
Corporation  is  specific  as  to  the  sinking  fund  provisions 
and  the  manner  of  investing  the   funds  by  the  trustee. 


282  CORPORATE  BOND   ISSUES 

Annual  deposits  to  the  fund  were  begun  the  year  following 
the  bond  issue.    Some  of  the  provisions  are  as  follows : 

"On  or  before  the  ist  day  of  April,  1904,  and  annually 
on  or  before  each  first  day  of  April  thereafter  until  all  the 
bonds  hereby  secured  shall  have  been  acquired  for  the  sink- 
ing fund  under  this  article,  or  shall  have  been  redeemed  as 
herein  provided,  or  shall  have  been  paid  or  satisfied,  the 
Steel  Company  will  pay  to  Messrs.  J.  P.  Morgan  &  Co., 
hereby  appointed  Sinking  Fund  Trustees,  or  to  their  suc- 
cessors in  trust,  the  sum  of  $1,010,000.  All  sums  so  re- 
ceived by  the  Sinking  Fund  Trustees,  together  with  the 
accretions  thereto  as  hereinafter  provided,  shall  constitute  a 
sinking  fund  for  the  redemption  of  the  bonds  hereby 
secured,  and  shall  be  held,  used,  and  applied  as  hereinafter 
provided. 

"All  bonds  hereby  secured  that  shall  be  purchased  by 
the  Sinking  Fund  Trustees  or  be  redeemed,  as  hereinafter 
provided,  by  use  of  moneys  in  the  sinking  fund,  shall  be 
deemed  to  remain  alive  for  the  purpose  of  such  sinking 
fund ;  and  semiannually  the  Steel  Company  shall  pay  to  the 
Sinking  Fund  Trustees  the  interest  on  all  such  bonds  of  the 
Steel  Company  held  by  the  Sinking  Fund  Trustees  for  the 
purpose  of  such  sinking  fund. 

"All  moneys  received  by  the  Sinking  Fund  Trustees 
under  this  article,  including  moneys  received  by  the  Sinking 
Fund  Trustees  from  the  Steel  Company  in  respect  of  interest 
on  bonds  hereby  secured  and  held  for  the  purposes  of  the 
sinking  fund,  and  moneys  received  for  principal  or  proceeds 
of,  or  interest  upon,  other  bonds  or  obligations  held  in  the 
sinking  fund,  and  also  all  interest  that  may  be  allowed  by 
the  Sinking  Fund  Trustees  upon  sinking  fund  moneys 
during  the  deposit  thereof  with  the  Sinking  Fund  Trustees, 
shall  be  held  by  the  Sinking  Fund  Trustee  as  bankers  in 
general  account " 


SINKING   FUNDS 


283 


§  250.     Sinking  Fund  Created  Out  of  Profits 

The  deed  of  trust  sometimes  requires  that  a  sinking  fund 
"shall  be  created  out  of  profits."  Even  where  this  is  done 
by  means  of  a  reserve  fund,  there  is  also  usually  a  reserva- 
tion of  actual  cash.  In  this  case  an  amount  equal  to  the 
cash  reservation  is  set  aside  out  of  profits  by  means  of  a 
debit  to  Profit  and  Loss  and  a  credit  to  Sinking  Fund 
Reserve,  or  to  Bond  Extension  Reserve,  or  to  Debt 
Extinguishment  Reserve. 

In  the  present  day  the  sinking  fund  reserve  is  not  so 
often  required  as  part  of  the  scheme  of  bond  redemption. 
Bonds  are  not  necessarily  paid  out  of  profits,  and  there  is 
no  more  need  of  reserving  profits  for  their  redemption 
than  for  the  reservation  of  profits  for  the  payment  of 
promissory  notes  or  ordinary  bank  loans.  The  provision, 
however,  has  some  merit  as  it  has  a  tendency  to  prevent 
directors  from  paying  dividends  with  cash  that  should  be 
placed  in  the  sinking  fund  or  be  kept  in  the  business  for 
working  purposes.     ( See  §  262. ) 

When  a  special  sinking  fund  reserve  is  created,  it  has 
no  specific  function  to  perform  beyond  the  mere  safeguard- 
ing of  the  profits,  and  when  the  bonds  are  redeemed  the 
account  must  be  closed  into  Surplus.  This  results  in  a 
sudden  and  substantial  increase  of  available  profits,  and 
the  directors  may  then  properly  "cut  a  melon"  if  they  see 
fit,  declaring  these  excess  profits  in  dividends.  This  would 
not  impair  the  capital  stock. 

§  251,    Safeguarding  the  Sinking  Fund 

The  sinking  fund  instalments  are  usually  placed  in  the 
hands  of  a  trustee  for  safe-keeping,  this  trustee  being  some 
reliable  trust  company,  a  firm  of  bankers,  or  a  committee 
of  individuals.  Sometimes  the  corporation  itself  takes 
charge  of  the  sinking  fund,  and  in  this  case  the  fund  is 


284  CORPORATE  BOND  ISSUES 

placed  in  the  care  of  either  the  board  of  directors  or  a 
committee  of  directors. 

The  sinking  fund  cash  may  be  deposited  by  the  trustee 
in  one  or  more  reliable  savings  banks  to  draw  the  regular 
rate  of  interest,  or  may  be  all  or  partly  used  for  the  purchase 
of  high-grade  interest-bearing  securities  such  as  are  legal 
for  investment  trust  funds.  Or,  as  stated,  it  may  be  used, 
in  whole  or  in  part,  for  the  purchase  of  the  company's  out- 
standing bonds  either  at  the  market  price  or  at  some  given 
price,  usually  above  par.  Bonds  redeemed  are  either  turned 
over  to  the  company  and  by  it  cancelled,  or  are  held  "alive" 
in  the  sinking  fund  as  a  source  of  income.     (See  §  260.) 

Sinking  fund  cash  is  occasionally  invested  in  other  ways, 
as  in  real  estate  mortgages,  in  building  and  loan  associa- 
tions, or  even  in  an  extension  of  the  company's  own 
properties;  any  such  variations  of  the  usual  investments 
depending  upon  the  provisions  of  the  deed  of  trust. 

§  252.    Adequacy  of  the  Sinking  Fund 

It  will  readily  be  seen  that  the  amount  of  the  sinking 
fund  deposits  must  be  calculated  in  advance,  so  that  when 
the  bonds  mature  there  will  be  sufficient  cash  available  for 
their  redemption.  In  case  of  shortage  for  any  cause, 
additional  funds  must  be  raised  to  pay  off  the  maturing 
bonds.  On  the  other  hand,  if  the  required  amount  has  been 
accumulated  prior  to  the  date  of  maturity,  further  sinking 
fund  payments  may  be  discontinued  unless  otherwise  pro- 
vided in  the  agreement  under  which  the  sinking  fund  is 
created. 

Where  definite  amounts  are  set  aside  yearly,  such 
amounts  are  generally  governed  by  the  aggregate  debt  out- 
standing, and  by  the  estimated  rate  of  interest  the  fund  is 
likely  to  earn.  For  example,  if  it  is  desired  to  meet  a  debt 
of  $800,000  in  twenty  years,  an  annual  deposit  of  $26,866 


SINKING  FUNDS 


285 


to  the  sinking  fund  would,  at  4%  interest  compounded 
annually,  provide  an  adequate  cash  supply  for  the  purpose, 
but  this  presupposes  that  the  trustee  will  be  able  to  keep 
the  funds  continuously  invested  at  this  rate.  This  may 
not  always  be  possible,  and,  on  the  other  hand,  it  is  probable 
that  the  trustee  may  be  able  to  secure  a  better  interest  rate, 
particularly  if  he  is  permitted  to  invest  in  the  company's 
own  bonds.  It  will  be  seen,  then,  that  the  exact  earning 
capacity  of  trust  funds  cannot  be  accurately  foretold,  and 
that  officials  should  be  governed  accordingly  in  determining 
the  sinking  fund  instalments. 

§  253.    Annuity  Method  for  Sinking  Funds 

There  is  a  growing  tendency  to  apply  scientific  annuity 
calculations  to  bonds  and  sinking  funds,  as  well  as  to 
amortizing  diminishing  balances.  Under  this  plan  it  is 
assumed  that  all  instalments  and  interest  accumulations  to 
the  sinking  fund  will  earn  compound  interest  from  year  to 
year,  at  a  given  rate,  say  3  or  4%.  The  amount  that  shall 
be  in  the  fund  at  any  time  is  carefully  estimated  when  the 
bonds  are  issued,  so  that  at  the  date  of  maturity  there  may 
be  in  the  hands  of  the  trustee  enough  to  pay  the  debt.  If  at 
any  time  this  estimate  falls  short,  because  of  a  lower  earn- 
ing rate  or  for  any  other  reason,  an  adjustment  must  be 
made  by  increasing  the  annuity  or  by  making  a  special 
deposit  equal  to  the  existing  deficit.  When  estimating  the 
rate  of  yield,  care  must  be  taken  not  to  use  a  higher  rate 
than  the  regular  savings  bank  interest.  If,  however,  the 
sinking  fund  trustee  invests  in  the  company's  own  bonds  at 
any  time,  the  income  will  be  materially  increased. 

§  254.    Calculating  Fund  Annuities 

Annuity  calculations  may  be  largely  avoided  by  the  use 

•For  a  detailed  discussion  of  the  subject  see  "The  Accountancy  of  Investments," 
by  Charles  E.  Sprague 


286  CORPORATE  BOND  ISSUES 

of  annuity  tables,  but,  notwithstanding  this,  it  is  most 
desirable  to  have  at  least  a  working  knowledge  of  their 
principles. 

An  annuity  is  a  definite  sum  of  money  paid  at  regular 
intervals.  For  example,  an  investment  of  $i  at  6%  per 
annum,  compounded  annually,  amounts  in  five  years  to 
approximately  $1.33822558.  In  other  words,  if  the  original 
$1  were  left  on  deposit  in  some  one  bank  for  five  years,  and 
the  annual  interest  of  6  cents  withdrawn  each  year  and 
deposited  in  another  bank  at  6%  compounded  annually,  at 
the  end  of  five  years  there  would  be  the  original  $1  in  the 
first  bank  and  $.33822558  in  the  second  bank.  This  latter 
amount  is  the  result  of  an  annual  deposit  of  6  cents  for  a 
period  of  five  years  with  the  interest  accumulations;  there- 
fore $.33822558  is  the  value  at  maturity  of  an  annuity  of 
6  cents  for  five  years  at  6%.  From  this,  the  final  value  of 
any  annuity  at  6%  for  five  years  may  readily  be  found,  by 
dividing  $.33822558  by  6  to  find  the  value  of  an  annuity  of 
I  cent  and  multiplying  this  by  the  number  of  cents  in  the 
actual  annuity.    Thus,  an  annuity  of  $1  for  five  years  has 

a  final  value  of  — ^ — —  X  100,  which  equals  $5.637093. 

This  plan  requires  the  use  of  only  the  ordinary  compound 
interest  tables.    The  process  may  be  stated  as  follows : 

To  find  the  final  value  of  an  annuity  for  a  given  time  at 
a  given  rate,  first  multiply  the  compound  interest  on  $1  for 
the  given  time  at  the  given  rate  by  100  and  divide  by  the 
given  rate.  This  gives  the  final  value  of  an  annuity  of  $1. 
Then  the  final  value  of  the  given  annuity  is  found  by  multi- 
plying the  final  value  of  an  annuity  of  $1  by  the  number  of 
dollars  in  the  given  annuity. 

The  following  example  will  illustrate  more  fully  the 
application  of  the  compound  interest  method  to  sinking 
fund  accumulations : . 


SINKING  FUNDS 


287 


The  People's  Gas  Company  on  January  i,  19 16,  issued 
$2,000,000  of  first  mortgage  5%  sinking  fund  gold  bonds, 
payable  in  twenty-five  years,  interest  payable  semiannually. 
In  order  to  meet  the  bonds  at  maturity,  such  annual  sum 
in  cash  is  to  be  deposited  with  a  designated  trust  company 
as  will  accumulate,  at  4%  compound  interest  during  the 
currency  of  the  obligations,  to  an  amount  sufficient  to  redeem 
the  bonds. 

In  finding  the  amount  of  the  yearly  annuity  payment, 
we  need  not  consider  discount  if  the  bonds  should  be  sold 
at  less  than  par,  nor  the  expenses  of  the  issue,  nor  the  pay- 
ment of  interest  coupons.  Bond  discount  and  expense  are 
treated  as  expense  incident  to  the  issue,  and  as  the  coupons 
mature  they  are  paid  out  of  current  funds,  and  the  amount 
charged  to  Bond  Interest,  which  in  turn  is  closed  into  the 
Profit  and  Loss  account.  We  have  therefore  to  provide 
only  for  the  payment  of  the  principal  sum  of  $2,000,000 
at  the  end  of  the  twenty-fifth  year. 

We  find — usually  by  consulting  an  annuity  table — that 
$1  invested  annually  at  4%  compound  interest  will  amount 
to  $41.64590829  at  the  end  of  twenty-five  years.  If  $1 
invested  annually  for  twenty-five  years  at  4%  compound 
interest  w411  amount  to  $41.64590829,  then  by  dividing  this 
value  into  $2,000,000 — the  amount  to  be  accumulated — 
the  quotient  is  the  number  of  dollars  which  must  be  invested 
each  year  to  amount  in  twenty-five  years,  at  4%  compound 
interest,  to  the  desired  sum.  Carrying  out  this  division  we 
find  the  required  annuity  payment  to  be  $48,023.93, 

In  ascertaining  the  amount  of  a  sinking  fund  annuity, 
the  determining  factors  are  the^  principal  to  be  accumulated, 
the  time  to  run,  and  the  rate  of  interest  obtainable. 

§  255.    Sinking  Fund  to  Retire  Preferred  Stock 

The  sinking  fund  plan  is  occasionally  adopted  for  the 


288  CORPORATE  BOND   ISSUES 

retirement  of  preferred  stock.  The  following  quotation 
has  reference  to  a  new  issue  of  preferred  stock  of  a  well- 
known  manufacturing  corporation : 

"A  sinking  fund  has  been  created  out  of  earnings  for 
the  retirement  of  the  preferred  stock  at  not  exceeding  $115 
per  share  and  accrued  dividend,  by  setting  aside  $200,000 
from  the  net  profits  for  the  fiscal  year  ended  July  31,  19 14, 
and  annually  thereafter  an  amount  equal  to  2%  of  the  par 
value  of  all  preferred  stock  at  any  time  theretofore  issued; 
and  if  in  any  fiscal  year  dividends  are  paid  on  the  com- 
pany stock  in  excess  of  7%,  the  next  succeeding  preferred 
stock  sinking  fund  instalment  is  to  be  increased  by  an 
amount  equal  to  such  excess." 

The  entries  for  such  a  sinking  fund  would  be  the  same 
as  in  the  case  of  a  sinking  fund  for  the  redemption  of  bonds. 


CHAPTER   XXI 

SINKING    FUNDS    (Continued) 

§  256.    Sinking  Fund  Account 

The  sinking  fund,  as  already  stated,  is  made  up  of 
periodical  cash  payments  to  the  trustee  and  the  interest 
accumulations;  therefore,  definite  book  entries  are  required 
at  regular  periods  to  record  properly  the  instalments  and 
interest  accretions.  An  account  must  be  opened  for  the 
sinking  fund,  or  for  the  sinking  fund  trustee,  to  which  shall 
be  debited  the  various  payments  and  accumulations,  with 
corresponding  credits  to  cash  and  to  sinking  fund  income. 
If  the  trust  agreement  requires  that  the  sinking  fund  shall 
be  created  out  of  profits,  then  an  annual  reserve  equivalent 
to  the  sinking  fund  instalment  must  be  set  aside.  The  fund 
itself,  however,  is  composed  of  assets  and  recorded  on  the 
debit  side  of  the  ledger,  while  the  Sinking  Fund  Reserve 
account  is  a  credit  and  shown  on  the  credit  side.  Careful 
book  records  must,  of  course,  be  kept  of  all  details  respecting 
the  sinking  fund  and  any  reserves  required  in  connection 
therewith. 

In  the  case  of  small  companies  the  sinking  fund  pro- 
cedure is  often  much  less  formal  than  in  the  case  of  larger 
companies,  and  it  is  not  unusual  for  the  whole  of  the  funds 
to  remain  in  the  hands  of  the  directors  themselves;  but  in 
any  case  the  accounts  should  be  so  kept  as  to  show  all 
information  that  may  be  required  by  any  of  the  interested 
parties  respecting  the  bonds  and  the  sinking  funds. 

The  regulations  of  the  Interstate  Commerce  Commission 
provide  for  sinking  fund  accounts  of  railroads,  and  quota- 

289- 


290 


CORPORATE  BOND  ISSUES 


tions  from  these  may  be  of  interest  to  other  than  railroad 
accountants.  The  first  quotation  prescribes  what  shall  be 
included  in  the  sinking  fund. 

"This  account  shall  include  the  amount  of  cash,  the 
ledger  value  of  live  securities  of  other  companies,  and  other 
assets  which  are  held  by  the  trustees  of  sinking  and  other 
funds  for  the  purpose  of  redeeming  outstanding  obligations, 
including  such  assets  so  held  in  the  hands  of  the  accounting 
company's  treasurer  when  the  assets  are  segregated  under 
a  distinct  fund;  also  amounts  deposited  with  such  trustees 
on  account  of  mortgaged  property  sold,  the  proceeds  of 
which  are  to  be  held  for  the  redemption  of  securities,  and 
the  par  value  of  live  securities  issued  or  assumed  by  the 
accounting  company  and  held  in  such  funds.  A  separate 
account  shall  be  kept  for  each  fund.  The  title  of  each  such 
account  shall  designate  the  obligation  in  support  of  which 
the  fund  is  created." 

Railway  companies  not  infrequently  create  sinking  fund 
reserves  also,  which,  of  course,  must  be  set  aside  out  of 
profits.  The  Commission's  ruling  on  the  subject  of  the 
Sinking  Fund  Reserve  account  is  as  follows : 

"This  account  shall  include  the  net  balances  in  accounts 
to  which  are  credited  definite  appropriations  of  income  and 
surplus,  whether  held  in  general  funds  or  specifically  set 
aside  in  the  hands  of  a  trustee  for  sinking  and  redemption 
funds.  It  shall  also  include  income  accretions  to  such  funds 
retained  therein.'* 

Income  from  sinking  fund  assets  is  required  to  be  cared 
for  in  the  manner  specified  by  the  Commission,  under  "In- 
come from  Sinking  and  Other  Reserve  Funds."  To  this 
account  are  to  be  credited  income  accrued  on  cash  securities 
and  other  assets  belonging  to  sinking  and  other  reserve 
funds,  such  income  being  included  under  non-operating 
i»come  in  the  company's  regular  income  statement.     In 


SINKING  FUNDS  201 

case  a  Sinking  Fund  Reserve  account  is  maintained,  a 
definite  amount  must  be  set  aside  out  of  income  by  a  debit 
to  the  account  "Surplus  Applied  to  Sinking  and  Other 
Reserve  Funds"  and  a  credit  to  "Sinking  Fund  Reserves." 
Such  amounts  are  generally  set  up  monthly,  but  at  the  end 
of  each  year  "Surplus  Applied  to  Sinking  and  Other 
Reserve  Funds"  account  must  necessarily  be  closed  out 

§  257.    Entries  for  Sinking  Fund  Instalments 

The  sinking  fund  instalments  are  paid  in  cash  to  the 
trustee,  either  half-yearly  or  yearly,  or  even  at  greater  inter- 
vals, according  to  the  requirements  of  the  deed  of  trust. 
For  illustration,  we  will  assume  that  the  5%  bond  issue  of 
the  Lenox  Iron  Works  for  $1,000,000  required  an  annual 
deposit  of  $50,000  to  the  sinking  fund  beginning  December 
31,  1916.    This  payment  will  be  recorded: 

December  31,  1916 

Sinking  Fund  Trustee $50,000 

To  Cash $50,000 

First  deposit  to  the  sinking  fund  for  redemp- 
tion of  $1,000,000  first  mortgage  5%  bonds 
due  January  i,  1936,  as  required  by  trust 
agreement. 

If  there  were  several  bond  issues  requiring  sinking 
funds,  each  fund  would  have  a  separate  account.  They 
should  be  designated  according  to  the  kind  and  tenor  of 
the  bonds,  as  "Sinking  Fund  of  First  Mortgage  5%  Bonds 
of  1925,"  "Sinking  Fund  of  $4,000,000  First  Mortgage 
5%  Sinking  Fund  Gold  Bonds  of  1940,"  as  the  case  may 
require.  Sometimes  the  name  of  the  trustee  is  included  in 
the  caption,  as  "Security  Trust  Company,  Trustee  of  Sink- 
ing Fund,"  or  "Trustee  of  Sinking  Fund  of  $1,000,000  5% 
Bonds,"  etc.  The  title  should  be  sufficiently  descriptive  to 
indicate  clearly  the  fund  and  its  purpose. 


292  CORPORATE  BOND   ISSUES 

§  258.     Entries  for  Sinking  Fund  Interest 

The  duty  of  the  trustee  being  to  safeguard  properly  the 
sinking  fund  and  to  keep  it  earning,  we  will  assume,  in  the 
present  instance,  that  he  deposited  the  funds  in  the  savings 
bank  to  draw  4%,  At  the  end  of  the  first  year  he  must 
make  his  report  to  the  company,  giving  the  status  of  the 
fund  and  stating  the  accumulated  income  thereon,  which  in 
this  case  would  be  4%  of  $50,000,  or  $2,000.  Upon 
receipt  of  this  report  the  following  entry  should  be  made 
on  the  company's  books : 

December  31,  1917 

Sinking  Fund  Trustee $2,000 

To  Sinking  Fund  Income $2,000 

To  record  income  from  sinking  fund  deposit  of 
$25,000  for  one  year  at  4%,  as  per  report  of 
the  trustee. 

Sinking  fund  income  should  be  credited  to  some  account 
that  will  clearly  indicate  the  sources  from  which  it  came, 
as  shown  in  the  above  entry.  It  is  manifestly  a  part  of 
the  company's  regular  income  and  must  sooner  or  later 
appear  in  the  Profit  and  Loss  account.  The  entry  for  sink- 
ing fund  income  would  be: 

Sinking  Fund  Income $2,000 

To  Profit  and  Loss $2,000 

To  close  sinking  fund  income,  being  the  total 
•     earning  for  the  year  as  reported  by  the  trustee. 

Under  the  terms  of  trust  under  which  the  sinking  fund 
was  established  no  mention  has  been  made  of  the  disposition 
of  the  income  from  the  fund,  but  it  might  be  handled  in  one 
of  three  ways,  i.e.,  turned  over  to  the  company,  retained  by 
the  trustee  as  an  addition  to  the  sinking  fund,  or  be  applied 
to  lessening  the  next  sinking  fund  instalment  (§  253).  For 
the  present  illustration  we  have  adopted  the  second  method 


SINKING   FUNDS  293 

as  the  entries  are  more  involved.  Under  the  first  method 
the  trustee  would  turn  over  to  the  company  cash  to  the 
amount  of  the  interest  or  income  and  the  company  would 
debit  cash  and  credit  sinking  fund  trustee. 

To  illustrate  monthly  entries  showing  the  accrual  of  the 
sinking  fund  interest,  the  following  have  been  constructed 
upon  the  facts  of  the  preceding  material: 

Accrued  Sinking  Fund  Income $166.67 

To  Sinking  Fund  Income $166.67 

Accrued  income  @  4%  on  $50,000  of  cash  on 
deposit  in  savings  bank  for  one  month,  1/12 
of  $2,000. 

This  entry  would  be  made  at  the  end  of  each  month, 
and  at  the  end  of  the  year  the  following  entry  would  be 
made: 

Sinking  Fund  Trustee $2,000 

To  Accrued  Sinking  Fund  Income $2,000 

Cash  collected  by  sinking  fund  trustee  during 
the  year,  being  4%  on  $50,000  on  deposit  at  the 
savings  bank. 

§  259.    Entries  for  Sinking  Fund  Investments 

Instead  of  depositing  the  sinking  fund  cash  in  the  sav- 
ings bank,  the  trustee  may  find  it  more  profitable  to  invest 
it,  or  a  portion  of  it,  in  gilt-edged  bonds  paying  a  higher 
rate  of  interest.  In  some  cases  he  is  required  to  invest  the 
funds  in  bonds  of  other  companies,  or  of  the  issuing  com- 
pany itself.  We  will  assume,  therefore,  that  on  January  i, 
1918,  the  trustee  purchases  $100,000  of  first  mortgage  5% 
bonds  of  the  United  States  Steel  Corporation  at  par,  interest 
due  January  i  and  July  i.  No  entry  need  be  made  on  the 
company's  books  for  this  transaction,  since  the  cash  used 
has  already  been  charged  to  the  sinking  fund  trustee;  in 
other  words,  he  is  simply  replacing  cash  assets  with  an 


294 


CORPORATE  BOND  ISSUES 


equivalent  amount  of  securities.  If  it  is  desired,  however, 
as  is  frequently  the  case,  to  show  the  sinking  fund  invest- 
ments separately  from  the  sinking  fund  cash,  even  though 
they  are  in  the  hands  of  the  trustee,  the  following  would  be 
the  procedure : 

January  i,  1918 

Sinking  Fund  Investments $100,000 

To  Sinking  Fund  Trustee $100,000 

For  investment  by  the  trustee  in  5%  bonds 
of  the  United  States  Steel  Corporation  at 
par,  as  per  his  report  of  this  day. 

An  investment  in  the  company's  own  bonds  would  be 
handled  in  practically  the  same  way. 

The  sinking  fund  now  contains  bonds  which  will  pay 
interest  twice  during  the  year,  $2,500  in  cash  each  six 
months.  If  the  bonds  had  been  purchased  at  a  premium  or 
discount,  another  element  would  have  been  introduced — 
that  of  properly  recording  such  difference.*  At  the  end  of 
the  first  half-year  an  entry  for  income  would  be  required  as 
follows : 

July  I,  1918 

Sinking  Fund  Trustee $2,500 

To  Sinking  Fund  Income $2,500 

For  coupons  collected  on  $100,000  5%  bonds  of 
United  States  Steel  Corporation  held  in  the 
sinking  fund,  as  per  report  of  the  trustee. 
(Full  details  necessary.) 

If  desired  this  could  be  handled  by  monthly  entries 
accruing  the  income. 

At  the  end  of  the  year,  interest  will  have  accumulated 
on  both  interest  and  bonds,  requiring  the  following  entry 
on  the  company's  books: 


*For  detailed  discussion  of  this  subject,  see  "The  Accounting  of  Investment" 
by  Charles  E.  Sprague. 


SINKING  FUNDS  295 

December  31,  1918 

Sinking  Fund  Trustee $2,630 

To  Sinking  Fund  Income $2,630 

For  interest  accumulations  to  the  fund,  as  per 
report  of  the  trustee,  as  follows: 
Interest  at  4%  on  $2,000  in  bank,  one 

year $80 

Interest  at  5%  on  $100,000  bonds,  one 

half-year  2,500 

Interest  at  4%  on  $2,500  in  bank,  one 
half-year  50 

Total $2,630 

Another  instalment  of  $50,000  is  due  the  sinking  fund 
at  this  time,  and  is  entered  as  before. 

§  260.    Entries  for  Investment  in  Issuing  Company's  Bonds 

The  trust  deed  in  many  cases  provides  for  the  redemp- 
tion of  the  bonds  by  the  sinking  fund  trustee,  either  at  the 
market  price  or  at  a  fixed  price,  and  he  is  compelled  to  carry 
out  such  provisions. 

In  that  event  he  either  carries  the  bonds  in  the  sinking 
fund  as  a  source  of  income,  or  turns  them  over  to  the  com- 
pany for  cancellation.  To  exemplify  the  entries  for  the 
purchase  of  such  bonds  for  sinking  fund  investment,  we  will 
carry  the  illustration  of  the  Lenox  Iron  Works  a  step 
further,  by  a  purchase  on  January  i,  1919,  of  $50,000  of 
the  company's  own  bonds  at  102  j/^. 

The  entry  to  be  made  for  this  transaction  must  be 
governed  by  the  circumstances,  not  because  the  bonds  are 
those  of  the  issuing  company,  but  because  of  the  disposition 
to  be  made  of  the  $1,250  premium  paid  thereon.  Three 
courses  are  open : 

I.  No  entry  need  be  made  on  the  company's  books  at 
all,  either  for  the  purchase  of  the  bonds  or  for  the  premium 
paid. 


296 


CORPORATE  BOND  ISSUES 


2.  An  entry  may  be  made  at  the  time,  debiting  Sinking 
Fund  Investments  or  some  other  appropriate  account  with 
the  cost  price  of  the  bonds,  and  crediting  Sinking  Fund 
Trustee  with  the  cost  of  the  bonds,  $51,250;  the  premium  in 
this  case  being  amortized  over  the  life  of  the  bonds. 

3.  An  entry  as  in  Method  2,  but  for  the  par  value  of 
the  bonds  instead  of  the  cost  price ;  in  this  case  the  premium 
must  be  charged  either  against  Sinking  Fund  Income, 
against  Profit  and  Loss,  or  to  an  account  called  "Premium 
on  Sinking  Fund  Investments."  The  last  named  account 
should  then  be  closed  into  Profit  and  Loss  or  be  amortized 
gradually  over  the  life  of  the  bonds. 

The  plan  of  entry  to  be  selected  will  depend  on  circum- 
stances. There  is  a  premium  of  $1,250  to  be  recorded  in 
some  way,  and  eventually  to  be  disposed  of ;  and  no  matter 
how  it  is  done,  the  company  is  the  loser  of  this  amount, 
especially  since  the  bonds  are  not  to  be  resold  but  held  until 
maturity  and  redeemed  at  par. 

Since  the  bonds  so  purchased  will  draw  5%,  it  may  be 
good  policy  to  pay  the  premium  and  then  charge  it  off,  all 
at  once,  or  gradually,  against  the  income  on  the  trustee's 
books;  the  trustee  deducting  same  from  the  amount  of 
income  reported  to  the  company.  But  since  the  Sinking 
Fund  account  on  the  company's  books  should  represent  the 
true  status  of  the  trustee's  holdings,  it  seems  advisable  to 
relieve  him  from  any  further  consideration  of  the  premium 
payment.  If  his  fund  is  required  to  be  maintained  at  a 
definite  status  at  all  times,  the  company  may  be  required  to 
pay  over  to  the  trustee  additional  cash  to  meet  the  premium 
payment. 

If,  however,  the  purchase  of  outstanding  bonds  at  a 
premium  is  to  continue,  it  would  seem  most  desirable  to 
charge  off  the  premium  annually  against  Profit  and  Loss 
account ;  or  if  a  Sinking  Fund  Reserve  account  is  maintained 


SINKING  FUNDS 


297 


(§§  262,  283)   the  premium  could  be  charged  against  it. 

If  the  bonds  are  purchased  in  the  open  market  at  a 
discount,  such  discount  may  be  credited  either  to  Profit  and 
Loss  or  to  Surplus. 

The  entry  at  the  date  of  purchase  under  the  approved 
plan  (3)  is  as  follows: 

January   i,    1919 

Sinking  Fund  Investments $50,000 

Premium  on  Sinking  Fund  Investments 1,250 

To  Sinking  Fund  Trustee $51,250 

For  purchase  of  $50,000  of  the  company's  5% 
bonds  at  1023/^  by  the  trustee  for  sinking 
fund  investment. 

If  the  sinking  fund  investments  are  not  kept  separately 
from  the  sinking  fund  cash,  then  an  entry  for  the  premium 
only  would  be  necessary,  and  this  premium  must  be  disposed 
of  by  monthly  entries,  or  at  the  end  of  the  year  by  a  debit 
to  either  Profit  and  Loss  or  Expense  as  follows : 

December  31,  1919 

Profit  and  Loss $1,250 

To  Premium  on  Sinking  Fund  Investments  $1,250 

To  close  this  account  for  the  year. 

The  United  States  Steel  Corporation  charges  off  each 
year  all  premiums  (upward  of  $800,000  or  more  per  year) 
on  bonds  purchased  and  held  by  the  sinking  fund  trustee, 
this  item  together  with  the  bond  interest  being  entered  as 
a  deduction  from  net  income.  Some  corporations  create 
reserves  to  take  care  of  these  premiums,  as  "Reserves  for 
Bond  Redemption  Premium"  or  some  other  appropriately 
named  account. 

§  261.    Entries  for  Bonds  Cancelled  Through  Sinking  Fund 

The  entries  for  bonds  of  the  issuing  company  purchased 

and  held  by  the  trustee  for  sinking  fund  purposes,  were  set 


298  CORPORATE  BOND  ISSUES 

forth  in  §  260.  When  the  trust  mortgage  requires  that  the 
bonds  of  the  company  so  purchased  shall  be  turned  over  to 
the  issuing  company  and  cancelled,  a  different  principle  is 
involved  and  the  status  of  the  sinking  fund  is  necessarily 
affected.  The  security  to  bondholders,  however,  remains 
the  same  in  either  case;  indeed,  from  the  bondholders' 
standpoint  the  cancellation  of  the  bonds  Is  preferable,  since 
his  margin  of  security  automatically  increases  in  proportion 
as  the  volume  of  outstanding  bonds  decreases.  The  trust 
agreement  may  stipulate,  however,  that  as  bonds  are  called 
for  redemption  and  cancelled,  certain  modification  of  the 
security  held  may  be  made.  For  a  further  explanation  of 
this  subject,  see  Chapter  XXII,  "Redemption  of  Bonds." 

Assuming  that  $50,000  of  bonds  purchased  by  the 
Lenox  Iron  Works  through  the  sinking  fund  trustee  on 
January  i,  19 19,  were  turned  over  to  the  company  and 
cancelled,  an  entry  would  be  required  as  follows : 

January  i,  1919 

First  Mortgage  5%  Sinking  Fund  Bonds $50,000 

Premium  on  Bonds  Cancelled 1,250 

To  Sinking  Fund  Trustee $51,250 

Purchase  for  cancellation  of  $50,000  of  the 
Company's  5%  bonds  at  102^  through  the 
sinking  fund  trustee. 

If  the  trust  mortgage  provides  that  the  sinking  fund 
shall  be  maintained  at  a  given  amount,  the  company  may 
be  compelled  to  reimburse  the  trustee  for  the  premium 
payment. 

It  may  even  be  a  condition  of  the  cancellation  agree- 
ment that  the  trustee  shall  be  reimbursed  in  full  for  the 
amount  expended  in  repurchasing  the  company's  bonds. 
This  must,  of  course,  be  provided  for  in  advance.  If  at  the 
time  of  cancellation  the  entire  amount  is  paid  over  to  the 
trustee,  an  entry  similar  to  the  following  would  be  made: 


SINKING  FUNDS  2gg 

January  i,  1919 

First  Mortgage  5%  Sinking  Fund  Bonds $50,000 

Premium  on  Bonds  Cancelled 1,250 

To  Cash $51,250 

(Full  explanation  required.) 

This  brings  the  sinking  fund  again  up  to  its  former 
status,  but  it  is  patent  that  unless  the  sinking  fund  is  to  be 
maintained  regardless  of  the  amount  of  the  outstanding 
bonds,  there  is  no  necessity  for  continuing  to  reimburse  the 
trustee  for  such  bond  purchases.  The  premium  of  $1,250 
may  at  the  proper  time  be  closed  either  into  Profit  and  Loss 
or  into  the  "Reserve  for  Bond  Redemption  Premium"  in 
case  the  latter  account  is  used. 

§  262.    Entries  for  Sinking  Fund  Reserve 

We  have  already  stated  (§  250)  that  the  deed  of  trust 
frequently  requires  an  amount  equal  to  the  sinking  fund 
instalments  to  be  set  aside  out  of  profits.*  To  carry  out 
this  provision  a  definite  amount  agreeing  with  the  sinking 
fund  payment  must  be  reserved  each  period,  whether  yearly 
or  oftener,  and  credited  to  a  reserve  account  set  up  for  that 
purpose.  Resorting  again  to  the  example  under  discussion, 
we  will  assume  that  the  Lenox  Iron  Works  is  required  to 
set  aside  each  year  out  of  profits  an  amount  equal  to  that 
of  the  sinking  fund  instalments,  $50,cxx)  per  year.  In  that 
event  it  becomes  necessary  to  withdraw  the  required  amount 
out  of  profits  by  an  entry  similar  to  the  following: 

December  31,  1916 

Profit  and  Loss $50,000 

To  Sinking  Fund  Reserve $$0,000 

To  set  aside  profits  equal  to  the  sinking  fund 
deposit  for  redemption  of  $1,000,000  first 
mortgage  5%  bonds,  in  accordance  with  the 
trust  agreement. 


•See  $S  282,  283  for  discussion  of  reserve  accounts  and  reserve  funds. 


300 


CORPORATE  BOND   ISSUES 


Whether  or  not  this  reserve  shall  be  kept  in  harmony 
with  the  Sinking  Fund  account  depends  upon  the  trust 
agreement.  In  case  this  is  a  requirement,  it  is  obvious  that 
every  dollar  added  to  the  fund  must  also  have  an  equivalent 
credit  to  the  reserve  account,  so  that  the  two  accounts  will 
show  like  amounts  though  on  opposite  sides.  This  plan  is 
illustrated  in  the  following  entries. 

During  19 17  the  sinking  fund  accumulates  a  profit  of 
$2,000,  which  was  credited  to  income  and  which  must  be 
reflected  in  the  reserve  account  as  well  as  in  the  sinking 
fund  account.  The  following  entry  will  therefore  properly 
record  the  regular  instalment  of  $50,000  and  the  income 
for  one  year  on  the  preceding  deposit : 

December  31,  1917 

Profit  and  Loss $52,000 

To  Sinking  Fund  Reserve $52,000 

To  set  aside  an  amount  equal  to  the  annual 
deposit  to  the  sinking  fund,  plus  the  profits 
accumulated  for  the  year,  as  follows: 
Annual  deposit  to  sinking  fund . . .  $50,000 
Income  on  previous  balance  reported 

by  trustee 2,000 

An  entry  similar  to  the  above  must  be  made  at  the  end 
of  each  year,  comprising  the  regular  instalment  and  all 
accrued  profits  for  the  year.  This  entry  presupposes,  of 
course,  that  additions  to  the  sinking  fund  have  already 
been  charged  to  the  trustee  and  credited  to  income  on 
December  31,  1917  (§  258),  and  again  July  i  and  Decem- 
ber 31,  1918  (§  259).  As  interest  accumulations  are 
reported  by  the  trustee,  adjusting  entries  are  made  to  the 
Sinking  Fund  account ;  but  under  the  plan  adopted  it  may 
not  be  necessary  to  credit  the  sinking  fund  reserve  until 
the  end  of  the  year,  at  which  time  the  entry  will  include 
both  the  regular  $50,000  instalment  and  the  accrued  interest. 


SINKING  FUNDS  3OI 

If  it  is  desired',  as  is  frequently  the  case,  to  credit  earn- 
ings directly,  to  the  Sinking  Fund  Reserve  account  instead 
of  to  income,  the  following  entry  would  be  required  for 
the  $2,000  above  reported. 

December  31,  1917 

Sinking  Fund  Trustee $2,000 

To  Sinking  Fund  Reserve $2,ooc 

For  interest  accretions  to  the  sinking  fund  for 
year,  as  per  report  of  the  sinking  fund  trustee. 

If  the  Sinking  Fund  account  and  the  Sinking  Fund 
Reserve  account  are  to  be  kept  in  harmony,  certain  adjust- 
ments may  be  required  from  time  to  time,  as  in  the  purchase 
of  bonds  of  the  issuing  company  or  others  at  a  premium. 
Referring  to  the  investment  of  $51,250  recorded  in  a 
previous  section  (§  260),  instead  of  charging  this  premium 
to  a  premium  account  it  may  be  charged  directly  to  the 
reserve  account  by  an  entry  as  follows: 

January  i,  1919 

Sinking  Fund  Reserve $1,250 

To  Sinking  Fund  Trustee $1,250 

(Full  explanation  required  here.) 

This  entry  if  used  would,  of  course,  be  incorporated  in 
the  entry  referred  to  above.  The  amount  might,  if  desired, 
be  first  charged  to  the  premium  account  and  in  turn  closed 
into  the  reserve  account.  There  are  many  ways  of  making 
entries  and  it  would  be  impracticable  to  enumerate  them 
all.     (See  also  §  283.) 

§  263.    The  Sinking  Fund  on  the  Balance  Sheet 

The  sinking  fund,  consisting  as  it  does  of  cash  and 
securities,  would  naturally  be  placed  among  the  assets  in 
the  balance  sheet;  but  since  the  sinking  fund  assets  are 
not  free  for  use  as  working  capital  but  have  been  handed 


302  CORPORATE  BOND  ISSUES 

over  to  the  trustee  practically  as  part  payment  on  the 
bonded  debt,  there  is  some  question  as  to  the  expediency 
of  including  them  among  the  balance  sheet  assets.  Many 
companies  list  sinking  fund  assets  among  the  corporate 
assets,  while  others  show  them  as  deductions  from  the 
bonded  debt.  The  plan  adopted  depends  largely  on  the 
ideas  of  the  accounting  officer  or  of  the  corporation  officials. 
The  following  methods  of  listing  are  in  common  use,  the 
amount  of  the  sinking  fund  being  as  of  December  31,  1918: 

1.  Sinking  Fund  in  Hands  01  Trustee $IS7,I30 

2.  Trustee    of    Sinking    Fund,    being   amount    of   cash    and 

securities    held    by    the    Trustee    for    redemption    of 
$1,000,000  s%  First  Mortgage  Bonds  of  1936 I57,I30 

3.  Sinking  Fund  Assets,  being  amount  in  hands  of  Trustee, 

as  follows : 

Invested  in   Securities $100,000 

Cash  in   Savings  Bank 57,i30    157,130 

4.  Sinking   Fund   Assets.      (Cash   and   securities   amounting 

to  $157,130  in   hands   of  Trustee,   deducted   from  out- 
standing bonds,  per  contra.) 

Under  the  last  plan  (4)  the  sinking  fund  assets  appear 
only  as  a  memorandum  among  the  assets,  while  the  amount 
of  the  funds  is  deducted  from  the  bonds  themselves  on  the 
opposite  side. 

§  264.    Entries  on  Books  of  Sinking  Fund  Trustee 

The  records  of  the  trustee  of  a  sinking  fund  are  not 
kept  in  any  standard  form.  Therefore,  all  that  is  necessary 
are  full  and  complete  accounts  so  that  the  conditions  of  the 
trust  can  be  readily  ascertained  at  any  time.  Of  course, 
the  accounts  of  a  trustee  and  of  the  company  should  be  in 
absolute  harmony  on  all  matters  pertaining  to  the  bond  issue 
and  the  sinking  fund. 

The  first  official  act  of  the  trustee  after  the  deed  of  trust 
is  executed,  is  the  indorsement  of  the  bonds  as  they  are 


SINKING  FUNDS  jOj 

issued.  A  record  of  this  is,  of  course,  kept  by  the  trustee, 
and  this  is  the  first  entry  on  his  books  until  either  interest 
or  a  sinking  fund  instalment  is  received  by  him  from  the 
company,  or  interest  becomes  due  on  the  bonds. 

To  illustrate  the  entries  on  the  books  of  the  sinking 
fund  trustee,  the  transactions  in  connection  with  the  bond 
issue  of  the  Lenox  Iron  Works  (§  257)  may  again  be  taken. 
The  first  payment  to  the  sinking  fund  trustee  was  $50,000 
in  cash  on  July  i,  191 6,  this  payment  being  made  to  meet 
the  semiannual  bond  interest.  The  entry  on  the  books 
of  the  Lenox  Iron  Works  was  as  follows : 

July  I,  1916 

Bond  Interest $50,cxx) 

To  Cash $50,000 

For  payment  of  semiannual  bond  interest  on 
$1,000,000  5%  bonds,  due  today  at  the  office 
of  the  trustee,  The  Grove  Street  Trust  Com- 
pany, to  whom  the  check  has  been  issued. 

The  corresponding  entry  on  the  books  of  the  sinking 
fund  trustee  is  shown  below : 

July  I,  1916 

Cash $50,000 

To  Coupons  No.  i  (Lenox  Iron  Works)  . .  $50,000 

First  deposit  of  cash  for  payment  of  Coupon 
No.  I  on  $1,000,000  coupon  bonds  of  the 
Lenox  Iron  Works. 

The  coupons  payable  account  will  obviously  remain 
open  until  all  the  coupons  are  paid.  As  payments  are  made, 
the  trustee,  of  course,  debits  the  coupon  account  and  credits 
cash. 

Upon  receipt  of  the  first  sinking  fund  instalment  the 
following  entry  was  made  on  the  books  of  the  Lenox  Iron 
Works : 


304 


CORPORATE  BOND   ISSUES 


December  31,  1916 
Sinking  Fund  Trustee  (or  Trustee  of  the  Sink- 
ing Fund) $50,000 

To    Cash $50,000 

(Explanation.) 

The  corresponding  entry  on  the  books  of  the  sinking 
fund  trustee  is  as  follows : 

December  31,  1916 

Cash $50,000 

To  Sinking  Fund  (Lenox  Iron  Works)..  $50,000 

First  sinking  fund  instalment  of  the  Lenox 
Iron  Works  for  redemption  of  $1,000,000 
first  mortgage  5%  bonds  of  1916,  due  Jan- 
uary I,  1936. 

The  succeeding  entries  of  the  sinking  fund  trustee 
would,  as  in  those  shown  above,  correspond  to  the  entries 
on  the  company's  books  and  therefore  require  no  further 
illustration. 


CHAPTER   XXII 

REDEMPTION    OF    BONDS 

§  265.    Plans  for  Redeeming  Bonds 

The  due  date  of  any  issue  of  bonds  is  stated  in  the 
deed  of  trust  and  also  on  the  face  of  each  bond.  The 
deed  of  trust  usually  provides  also  that  if  any  instalment 
of  bond  interest  is  not  paid  when  due,  and  default  con- 
tinues for  a  specified  length  of  time,  the  principal  is 
thereby  matured  and  must  be  paid.  In  event  of  continued 
default  in  either  the  principal  or  interest,  it  is  usually 
provided  that  foreclosure  may  follow,  or  perhaps  the 
trustee  is  authorized  to  take  possession  of  the  mortgaged 
property  and  operate  it  for  the  benefit  of  the  bondholders. 

The  method  of  redeeming  bonds  depends  largely  on 
the  nature  of  the  particular  bonds.  The  following  methods 
are  in  general  use: 

1.  Payment  in  cash  at  maturity,  usually  through  the 
sinking  fund. 

2.  By  calling  certain  bonds  each  year  for  redemption. 
Under  this  method  the  numbers  of  the  outstanding  bonds 
are  placed  in  a  box  or  hat,  shaken  up,  and  a  given  number 
of  them  drawn,  those  drawn  indicating  the  bonds  which 
are  to  be  redeemed.  Legal  notice  of  the  numbers  drawn 
for  redemption  is  given  to  the  bondholders  by  advertise- 
ment in  the  daily  papers,  and  the  bonds  specified  cease  to 
bear  interest  from  the  date  of  the  drawing,  or  some  other 
specified  date. 

3.  Refunding  at  maturity,  in  which  case  the  bonds 
are  cancelled  and  new  ones  issued  in  their  place    the 

305 


3o6  CORPORATE  BOND  ISSUES 

holders  of  the  old  bonds  either  taking  new  bonds,  or  cash 
secured  by  the  sale  of  these  new  bonds,  in  exchange  for 
their  old  bonds. 

4.  By  serial  payments.  Under  this  plan  serial  bonds 
are  issued,  payable  in  instalments  of  so  much  per  year 
during  the  currency  of  the  bonds. 

5.  By  conversion  into  stock  of  the  company,  either 
at  a  fixed  date  or  at  the  maturity  of  the  bonds,  or  at  some 
other  convenient  time  prior  to  maturity. 

§  266.    (i)  Redemption  of  Bonds  Through  Sinking  Fund 

Bonds  redeemed  through  the  sinking  fund  are  paid  at 
maturity  by  the  trustee,  who  then  passes  the  cancelled 
certificates  over  to  the  issuing  corporation  for  final  record. 
Sometimes  the  cancelled  bonds  are  cremated  (§  278), 
though  more  frequently  retained  by  the  company  as  a 
permanent  voucher. 

The  book  entries  at  maturity  of  the  bonds  are  very 
simple.  To  illustrate  the  entries  necessary,  the  bond  issue 
of  the  Lenox  Iron  Works  may  again  be  taken.  This  con- 
sisted of  $1,000,000  of  first  mortgage  5%  sinking  fund 
bonds  due  January  i,  1936.  Assuming  that  the  bonds 
have  matured  and  that  the  sinking  fund  for  their  redemp- 
tion amounts  to  $992,000,  leaving  $8,000  more  to  be 
made  up  by  the  company,  book  entries  are  required  as 
follows: 

January  i,  1936 

Sinking  Fund  Trustee ". $8,000 

To  Cash $8,000 

Cash  paid  over  to  the  trustee  of  the  sinking  fund 
as  per  request,  being  the  amount  still  re- 
quired by  him  for  payment  of  $1,000,000  first 
mortgage  bonds  maturing  this  day. 

If  the  sinking  fund  had  been  scientifically  calculated 


REDEMPTION   OF  BONDS  ^q^ 

and  maintained  at  all  times  at  a  given  rate  of  interest 
without  loss,  the  required  amount  for  the  redemption  of 
the  bonds  should  be  available  at  their  maturity  in  the 
sinking  fund.  It  is,  however,  for  obvious  reasons,  but 
seldom  that  the  sinking  fund  is  exactly  equal  to  the 
maturing  bonds.  When  a  shortage  occurs  the  company 
must  raise  the  additional  funds.  If,  on  the  other  hand, 
the  fund  is  in  excess  of  the  required  amount,  such  excess 
must,  of  course,  be  returned  to  the  company  after  the 
bonds  are  redeemed. 

Upon  receiving  notice  from  the  trustee  that  all  of  the 
bonds  have  been  redeemed,  the  following  entry  is  made: 

January  i,  1936 

First  Mortgage  Bonds $1,000,000 

To  Sinking  Fund  Trustee $1,000,000 

For  payment  by  the  trustee  of  $1,000,000 
first  mortgage  5%  twenty -year  sink- 
ing fund  bonds  of  191 6  due  this  day. 
The  trust  deed  has  been  cancelled  and 
the  mortgage  satisfied  of  record  in  the 
county  recorder's  office. 

Through  the  above  entry,  both  the  bond  and  the 
sinking  fund  accounts  have  been  closed  out.  This  results 
in  the  cancellation  of  two  main  accounts.  The  Sinking 
Fund  Investments  account,  if  kept  on  the  company's 
books,  should  be  closed  into  the  trustee's  account  when 
he  turns  the  securities  into  cash.  In  that  case  the  entry 
given  above  should  be  preceded  by  the  following  entry, 
for  the  amount  assumed  to  have  been  invested  in 
securities: 

Sinking  Fund    i  rustee $900,000 

To  Sinking  Fund  Investments $900,000 

For  conversion  into  cash  by  the  trustee  of 
sinking  fund  securities  held  by  him  to 
the  amount  of  $900,000. 


3o8  CORPORATE  BOND  ISSUES 

This  entry  is  made  regardless  of  whether  the  sinking 
fund  investments  are  bonds  of  the  issuing  company  or  of 
other  companies.  The  cancellation  of  all  three  accounts 
involved  in  the  above  entries  might,  of  course,  be  accom- 
plished through  the  one  journal  entry  as  follows: 

First  Mortgage  Bonds $1,000,000 

To  Sinking  Fund  Investments $900,000 

"    Sinking  Fund  Trustee 100,000 

(Full  explanation  required  here.) 

If  a  Sinking  Fund  Reserve  account  had  also  been  created 
out  of  profits  (see  §§  250  and  262),  as  is  frequently  the 
case,  it  can  now  be  disposed  of,  as  there  is  no  further  need 
of  preventing  the  declaration  of  dividends  to  the  impairment 
of  current  assets.  The  Surplus  account  or  some  permanent 
reserve  can  be  credited  with  the  amount  of  this  account. 
Assuming  that  it  has  a  credit  balance  of  $1,000,000,  the 
following  entry  is  required : 

Sinking  Fund  Reserve $1,000,000 

To  Surplus $1,000,000 

(Full  explanation  required  here.) 

This  reserve  may  now  be  used  for  dividend  purposes. 
If  that  is  not  desired,  it  should  be  credited  to  some 
account  other  than  Surplus  account,  such  as  Capital 
Surplus,  Appropriated  Surplus,  or  Reserve  for  Deprecia- 
tion. 

§  267.    (2)  Bonds  Drawn  by  Lot  for  Redemption 

When  bonds  are  to  be  redeemed  before  maturity,  the 
sinking  fund  trustee  either  advertises  for  the  desired 
number  of  bonds  at  a  stated  price,  draws  certain  numbers 
(bonds)  by  lot  for  redemption  at  a  fixed  price,  or  buys 
them  in  the  market  at  the  best  prices  obtainable.  If  the 
bonds  to  be  redeemed  are  drawn  by  lot,  in  the  case  of 


REDEMPTION  OF  BONDS  309 

coupon  bonds,  notice  thereof  is  given  to  the  holders  by 
means  of  newspaper  advertisements;  in  the  case  of  reg- 
istered bonds,  notices  are  sent  direct  to  the  holders.  When 
bonds  of  the  issuing  company  are  purchased  by  the  sinking 
fund  trustee,  they  are,  according  to  the  provisions  of  the 
trust  agreement,  either  retained  as  a  sinking  fund  in- 
vestment— unless  resold  later  at  a  higher  price — or  are 
handed  over  to  the  issuing  company  and  cancelled.  The 
company's  bonded  indebtedness  is  in  the  latter  case 
reduced  to  the  extent  of  the  bonds  retired. 

The  investor  frequently  objects  to  the  plan  of  drawing 
bonds  for  retirement,  because  he  never  knows  when  his 
number  may  be  drawn.  He  must  therefore  be  on  the 
lookout  at  each  interest  period  for  the  announcement  of 
drawings,  thereby  causing  a  certain  amount  of  anxiety. 
If  he  should  overlook  the  announcement,  he  would  hold 
his  bonds  and  be  deprived  of  the  use  of  his  money  for  the 
ensuing  six  months,  discovering  his  loss  at  that  time 
through  the  fact  that  his  coupons  came  back  unpaid. 
Also  the  plan  results  in  a  very  short  investment  period 
for  those  whose  bonds  are  called  first,  and  an  uncertain 
investment  period  for  all  the  holders  of  the  particular 
bonds.  On  the  other  hand,  the  fact  that  called  bonds  are 
usually  purchased  at  a  premium  has  a  tendency  to  offset 
any  trouble  to  which  the  investor  may  be  put  in  watching 
for  the  newspaper  notices  of  calls  and  through  the  uncer- 
tainty of  his  investment  period. 

The  plan  of  selecting  bonds  for  redemption  by  lot 
applies  equally  as  well  to  debentures,  short  term  notes, 
and  other  obligations.  Bonds  of  clubs,  institutions,  office 
buildings,  and  the  like,  are  frequently  issued  under  this 
plan  of  redemption. 

The  following  advertisement  calling  for  bonds  for 
redemption  is  typical: 


2IO  CORPORATE  BOND  ISSUES 

Redemption  Notice 
American  Smelters  Securities  Co. 

Six  Per  Cent  Fifteen- Year  Sinking  Fund  Gold  Bonds,  Dated 
February  i,  191X 
Notice  Is  Hereby  Given  that  one  million,  three  hundred  and  forty- 
seven  thousand  dollars  ($1,347,000)  face  amount  of  the  above-described 
bonds  were  this  day  drawn  for  redemption  as  provided  in  Article 
Fourth  of  the  Trust  Agreement  securing  same,  and  numbered  as 
follows : 

(1368  numbers  listed  here) 

All  future  interest  on  any  of  the  bonds  so  designated  ceases  with 
the  coupon  due  August  i,  1916. 

In  accordance  with  the  foregoing,  said  numbered  bonds  will  be  paid 
at  this  office  on  and  after  the  first  day  of  August,  1916,  at  105%  and 
accrued  interest. 

Central  Trust  Company  of  New  York 

Trustee 
By  Geo.  W.  Davison,   Vice-President 
Dated  New  York,  April  17,  1916. 

The  following  bonds,  called  for  redemption  on  February  i,  1916, 
have  not  been  presented  for  payment,  viz. : 

(139  numbers  here) 

§  268.    Entries  for  Bonds  Called  for  Redemption 

When  bonds  are  called  for  redemption,  they  may, 
according  to  the  terms  of  the  deed  of  trust,  be  either 
retained  by  the  sinking  fund  trustee  as  a  sinking  fund 
investment,  or  be  turned  over  to  the  company  for  can- 
cellation. Entries  for  bonds  redeemed  for  sinking  fund 
investment  will  be  found  in  §  260;  entries  for  bonds  pur- 
chased by  the  sinking  fund  trustee  for  cancellation  will  be 
found  in  §  261. 

§  269.    (3)  Refunding  Bonds 

As  already  stated,  a  bond  issue  may  be  renewed  or 
"funded"  by  a  new  issue  of  bonds  bearing  equally  as  good 
or  better  security.     The  deed  of  trust  may  even  contain 


REDEMPTION  OF  BONDS  ^U 

a  provision  giving  the  company  the  option  of  calling  the 
bonds  on  or  after  a  certain  date.  The  reason  for  this  is 
apparent.  If  the  bonds  are  issued  at  a  time  when  the 
interest  rate  is  high  or  when  the  company  is  not  well- 
known,  the  inclusion  of  a  redemption  clause  that  may  be 
taken  advantage  of  when  the  company  is  better  known  or 
stronger  financially,  or  the  money  market  is  easier,  would 
seem  wise  and  prudent,  as  it  may  then  call  the  old  bonds 
and  reissue  new  bonds  bearing  a  lower  rate  of  interest. 
Other  conditions  may  arise  also  which  would  render  the 
refunding  of  bonds  before  maturity  necessary  or.advisable. 

Nearly  all  railroad  bonds  are  issued  with  the  expec- 
tation of  refunding  at  maturity.  There  are  several  reasons 
for  this  practice,  but  chiefly  because  of  the  relation  of  the 
bondholder  to  the  corporation.  Bond  investors  desire  a 
fair  return  on  their  money,  a  sufficient  guarantee  that  the 
principal  is  well  secured,  and  assurance  that  such  an  in- 
vestment is  permanent  and  not  likely  to  be  interrupted. 
A  long  time  investment  with  a  certainty  of  security  and 
interest  payments  at  a  reasonable  rate  is  greatly  pre- 
ferred to  short  time  paper  even  at  a  higher  rate  of  interest. 
For  this  reason,  the  refunding  of  bonds  when  the  company 
is  of  unquestioned  financial  strength  is  looked  upon  with 
favor. 

On  the  other  hand,  corporation  interests  are  also  well 
served  by  the  refunding  of  bonds  as  opposed  to  their 
redemption  in  cash.  If  the  company  can  make  io%  on  its 
investment  in  business  activities,  it  seems  better  to  use 
the  money  in  that  way  than  to  set  it  aside  in  a  sinking 
fund  to  earn  3  or  4%. 

Turning  from  the  railroads,  it  is  apparent  that  long 
time  or  refunding  bonds  are  not  likely  to  be  issued  on 
properties  having  a  short  Ufe  or  a  wasting  nature;  as  the 
ordinary  manufacturing  plant,  a  coal  mine,  standing  tim- 


312  CORPORATE    BOND    ISSUES 

ber,  or  tracts  of  land  which  are  to  be  broken  up  into 
building  lots.  In  cases  of  this  kind  the  sinking  fund 
method  or  the  serial  bond  almost  invariably  prevails. 

Public  utility  corporations,  as  a  rule,  keep  increasing 
their  bonded  debts  until  the  limit  prescribed  by  charter 
is  reached,  so  that  when  one  issue  is  cancelled  another 
and  larger  issue  replaces  it,  and  as  the  process  goes  on 
any  underlying  or  prior  lien  obligations  are  likely  to  be 
combined  in  the  new  issue. 

§  270.    Entries  for  Refunding  Bonds 

For  illustration  of  the  entries  required  where  bonds 
are  refunded,  we  will  assume  that  the  first  mortgage  5% 
bonds  of  the  Pleasant  Valley  Electric  Railway  Company 
for  $10,000,000  matured  July  i,  1916,  and  that  they  were 
refunded  by  part  of  a  new  issue  of  consolidated  first  mort- 
gage 5%  fifty-year  bonds  for  $20,000,000.  The  following 
entry  is  required  for  the  refunding  operation: 

July  I,  1916 
First  Mortgage  5%  Bonds  (maturing) . .  $10,000,000 
To    Unissued    Consolidated    First 
Mortgage  5%  Bond's  (or  Cash)  $10,000,000 

Refunding  of  $10,000,000  first  mort- 
gage 5%  bonds  due  this  day  at  the 
office  of  the  trustee,  the  Barton 
Trust  Company.  The  bonds  have 
been  cancelled  and  returned  and  the 
mortgage  satisfied  of  record. 

In  cases  such  as  this  the  new  bonds  may  either  be 
exchanged  for  the  old,  as  assumed  above,  or  they  may  be 
sold  in  the  usual  way  and  cash  used  for  redeeming  the 
maturing  obligations.  This  latter  plan  is  the  more  general 
and  is  the  one  employed  by  the  Pennsylvania  Railroad 
Company  and  many  other  large  companies. 


REDEMPTION   OF  BONDS 


313 


§  271.    (4)   Redemption  of  Serial  Bonds 

Serial  bonds  have  already  been  discussed  in  §  192. 
The  bonds  are  usually  paid  in  annual  instalments  of  given 
amounts  beginning  a  few  years  after  the  date  of  issue; 
therefore  the  redeeming  process  is  a  continuous  feature 
after  it  is  once  started.  Like  other  mortgage  bonds, 
serial  bonds  are  usually  payable  at  the  office  of  the  com- 
pany's fiscal  agent  or  at  the  office  of  the  trustee,  but  in 
any  case  the  money  required  for  their  redemption  is  paid 
over  by  the  company  as  the  instalments  mature.  The 
interest  coupons  are  payable  by  the  company  or  its  fiscal 
agent. 

Assuming  that  the  first  mortgage  6%  serial  bond  issue 
of  $3,(X)0,ooo  of  the  Georgian  Paper  and  Pulp  Company 
is  payable  in  instalments  of  $150,000  each  year  beginning 
February  i,  1919,  and  that  the  date  for  paying  the  first 
instalment  is  at  hand,  the  following  retirement  entry  is 
made: 

February  i,  19 19 

First  Mortgage  6%  Serial  Bonds $150,000 

To  Cash $150,000 

Payment  of  Instalment  No.  i  of  the  $3,- 
000,000  first  mortgage  serial  6%  bonds  of 
1916. 

As  the  bonds  are  paid  they  are  cancelled  and  handed 
over  to  the  company  for  record.  In  place  of  the  above 
entry  two  entries  may  be  substituted  if  desired,  one 
crediting  cash  and  debiting  the  trustee  as  the  cash  is  paid 
over,  and  the  other  debiting  the  bond  account  and  credit- 
ing the  trustee  as  the  bonds  are  received  by  the  company. 

Under  the  trust  deed  the  company  has  the  privilege 
of  paying  off  additional  instalments  in  order  of  serial 
numbers  (or  the  reverse  order),  in  advance  of  maturity,  at 
103  and  interest.     As  already  explained  in  §  260,  the  pre- 


314 


CORPORATE  BOND   ISSUES 


mium  paid  for  such  redemption  is  in  turn  closed  into  Profit 
and  Loss.  In  that  case  the  entry  differs  from  the  above  only 
with  respect  to  premium  paid,  and  is : 

First  Mortgage  6%  Serial  Bonds $150,000 

Premium  on  Redeemed  Bonds 4>500 

To  Cash $154,500 

(Full  explanation  required  here.) 

§  272.     (5)  Entries  for  Convertible  Bonds 

A  convertible  bond,  as  already  stated  (§  191),  is  one 
which  under  prescribed  conditions  carries  the  right  of 
conversion  into  other  securities  of  the  same  corporation. 
These  convertible  bonds  may  be  exchanged  for  stock  of 
the  company  at  a  stated  price,  provided  the  holders 
thereof  care  to  take  advantage  of  the  privilege.  For  in- 
stance, the  convertible  4  1/2%  bonds  for  $67,000,000  of 
the  American  Telephone  and  Telegraph  Company  are 
convertible  at  par  into  stock  of  the  company  at  $120  per 
share  from  March  i,  191 5,  to  March  i,  1925.  When  the 
convertible  bonds  are  issued  provision  is,  of  course,  made 
so  that  there  may  be  a  sufficient  amount  of  unissued  stock 
or  other  securities  to  which  the  conversion  privilege  will 
apply. 

The  entries  required  to  give  expression  to  such  a 
conversion  are  quite  simple: 

Convertible  Bonds,  etc 

To  Unissued  Stock  (or  other  security) ...  

"   Premium  on  Stock 

(Full  explanation.) 

§  273.    Redemption  of  Collateral  Trust  Bonds 

The  entries  for  the  redemption  of  collateral  trust  bonds 
are  not  different  from  those  for  the  redemption  of  ordinary 
mortgage   bonds,    except    that    the   security   which   had 


REDEMPTION   OF   BONDS 


315 


passed  out  of  the  company's  possession  at  the  date  of 
issue  now  comes  back.  An  extra  entry  is  required  to 
record  this  transfer. 

Assuming  that  the  due  date  of  the  Harney  Electric 
Company's  $1,000,000  twenty-year  collateral  trust  5% 
gold  bonds,  interest  payable  half-yearly,  has  arrived,  that 
they  have  been  paid  by  the  trustee,  and  that  the  collateral 
has  been  released  to  the  company,  the  entry  required  at 
the  time  is: 

July  I,  1936 

Collateral  Trust  5%  Bonds $1,000,000 

To  Cash $1,000,000 

Payment  of  $1,000,000  twenty-y^ar  5% 
collateral  trust  bonds  matured  this  day 
at  the  office  of  the  trustee,  the  Hudson 
Trust  Company. 

If  desired,  this  amount  may  first  be  charged  to  the 
trustee,  if  payment  is  made  by  him,  and  be  followed  by 
another  entry  debiting  the  bond  account  and  crediting 
the  trustee. 

The  collateral  security  now  having  been  released  to 
the  company  may  be  recorded  by  the  following  entry: 

July  I,  1936 

Investments   $1,340,000 

To  Pledged  Investments $1,340,000 

Return  of  collateral  pledged  with  the 
Hudson  Trust  Company  as  security 
for  $1,000,000  collateral  trust  bonds, 
as  follows:  (Here  list  details  and 
values  of  stocks  and  bonds  returned.) 

This  returns  the  securities  to  the  Investments  account, 
and  they  are  now  free  for  use  in  other  ways  if  necessary. 
The  explanations  given  above  apply  also  to  secured  short 
term  notes,  and  like  obligations. 


3i6 


CORPORATE  BOND  ISSUES 


§  274.    Redemption  of  Short  Term  Notes 

Short  term  notes  (§  203)  are  either  secured  or  un- 
secured, and  as  they  mature  they  are  paid  like  other  bond 
obligations,  and  the  book  entries  required  are  similar  to 
those  for  other  classes  of  bonds.  If  the  notes  are  secured 
by  a  deposit  of  collateral,  an  entry  should  be  made  as  soon 
as  the  collateral  is  returned,  removing  the  collateral  from 
the  Pledged  Collateral  account  and  returning  it  to  the 
Investments  account,  as  in  the  case  of  collateral  trust 
bonds.  Unissued,  or  nominally  issued,  bonds  of  the  com- 
pany that  have  been  pledged  as  security  for  bank  loans  or 
other  obligations,  should  in  like  manner  be  recorded  in  some 
distinguishing  account. 

§  275.    Redemption  of  Equipment  Trust  Bonds 

Equipment  certificates  are  usually  issued  in  series,  as 
Series  A,  B,  C,  etc.,  each  being  secured  by  a  given  portion 
of  the  equipment.  As  each  instalment  of  the  certificates 
is  paid  by  the  trustee  out  of  money  supplied  by  the  com- 
pany, the  equipment  trust  certificates  are  cancelled  and 
returned  to  the  company.  As  soon  as  a  series  is  paid  oflF, 
which  may  require  two  or  three  instalments,  the  equip- 
ment thereunder  is  released  to  the  company.  It  is  then 
transferred  from  the  trust  equipment  account  to  the  free 
equipment  account.  Assuming  that  upon  payment  of  the 
first  instalment  of  $1,000,000  of  an  equipment  trust  bond 
issue,  one-fifth  of  the  equipment  held  as  security  is  re- 
leased to  the  company,  it  would  be  reflected  in  the 
following  entries,  it  being  assumed  that  the  released 
equipment  is  of  the  value  of  $2,000,000: 

July  I,  1916 

Equipment  Trust  Certificates $1,000,000 

To  Cash $1^000,000 

First  instalment  of  6%  equipment  trust 
certificates  paid  this  day,  etc. 


REDEMPTION  OF  BONDS 


317 


This  entry  is  then  followed  by  a  transfer  entry 
somewhat  as  follows: 

Equipment  Cars  (or  Locomotives) $2,000,000 

To  Equipment  Trust  Cars $2,000,000 

For  transfer  of  $2,000,000  of  equipment 
released  under  equipment  trust  cer- 
tificates.    (Full  explanation.) 

§276.    Redemption  of  Guaranteed  Bonds 

Guaranteed  bonds  are  issued,  as  a  rule,  by  subsidiary 
or  affiliated  companies  (see  §  197),  and  should  be  re- 
deemed by  the  issuing  company.  A  contingent  liabiHty 
is,  however,  incurred  by  the  guaranteeing  company  as 
soon  as  the  bonds  are  indorsed,  but  it  is  not  usual  to  make 
any  entry  in  the  books  of  account  at  the  time.  A  complete 
record  of  the  matter  is,  of  course,  made  in  the  corporate 
minutes.  If  no  entry  is  made  when  the  bonds  are  indorsed 
by  the  company,  then  no  entry  is  necessary  at  their 
maturity  so  long  as  they  are  duly  paid  by  the  issuing 
company.  On  the  other  hand,  if  an  entry  is  made  at  the 
beginning,  an  offsetting  entry  is  required  when  the  bonds 
are  paid  by  the  issuing  company. 

If  the  guaranteeing  company  is  required  to  make 
payment  for  all  or  any  part  of  the  bond  issue,  it  must 
then,  of  course,  make  an  entry  debiting  the  issuing  com- 
pany and  crediting  cash,  and  will  look  to  the  issuing 
company  for  reimbursement.  The  Pennsylvania  Railroad  in 
191 5  had  outstanding  guaranteed  stock  trust  certificates  of 
underlying  companies  aggregating  $13,393,250,  of  which 
$7,478,250  matures  in  1948  and  $6,915,000  in  192 1. 

§  277.     Bonds  in  Default 

In  case  of  default  in  the  payment  of  bonds,  or  even 
in  the  interest  thereof,  the  trustee  is  usually  empowered 


3i8 


CORPORATE  BOND  ISSUES 


by  the  deed  of  trust  to  enter  upon  and  take  charge  of  the 
mortgaged  property  for  the  benefit  of  the  bondholders. 
In  that  event  the  company  is  forced  into  bankruptcy,  or 
a  receivership,  or  a  reorganization  of  some  kind,  unless 
the  bondholders  consent  to  an  extension  or  renewal,  oi 
to  some  other  plan  of  adjustment  that  will  permit  the 
company  to  continue  its  career.  For  instance,  the 
Missouri  Pacific  Company's  5%  secured  notes  for  $25,- 
000,000,  due  June  i,  1914,  were  extended  for  one  year 
with  interest  at  6%.  Again,  in  191 5  these  notes  were 
renewed  for  another  year,  over  95%  of  the  holders  having 
agreed  to  the  extension.  Those  not  agreeing  to  the  ex- 
tension were  paid  in  cash. 

Unpaid  bond  obligations  should,  by  right,  be  removed 
from  the  regular  bond  account  and  credited  to  some  other 
account  that  will  clearly  designate  the  nature  of  the 
obligation,  as: 

Four- Year  Secured  6%  Notes $600,000 

To  Matured  Four- Year  6%  Notes ....  $600,000 

An  account  may  even  be  opened  for  "Defaulted  6% 
Notes,"  "Overdue  6%  Notes,"  "Renewed  6%  Notes,"  or 
"Extended  6%  Notes,"  as  the  case  may  require. 

§  278.    Destroying  Bonds 

When  bonds  are  redeemed  by  the  trustee  they  are,  of 
course,  cancelled,  and  they  are  then  either  returned  to  the 
company  or  cremated  by  the  trustee.  The  advisability  of 
burning  retired  bonds  is  a  matter  of  dispute.  If  done  at 
all,  it  is  done  in  the  presence  of  the  officers  of  the  issuing 
company  and  of  the  trust  company,  all  of  whom  sign  in 
duplicate  a  cremation  certificate,  their  signatures  being 
duly  witnessed.  The  cremation  certificate  reads  about  as 
follows: 


REDEMPTION   OF  BONDS 


319 


"This  Is  to  certify  that  we,  the  undersigned,  have  this 
day  in  the  presence  of  each  other,  destroyed  the  following 
described  securities  by  burning  the  same  to  ashes."  (Here 
follows  a  detailed  description  of  the  securities  burned.) 


Part  V — Corporation  Reports  and  Statements 


CHAPTER    XXIII 

CLOSING  THE   BOOKS;   RESERVE   FUNDS 
AND  SURPLUS 

§  279.    Closing  the  Books 

At  the  end  of  each  fiscal  year,  or  oftener,  It  is  customary 
to  "close  the  books,"  that  is,  "close  the  ledger."  Where  it 
can  be  done  conveniently,  it  is  usual  and  advisable  to  make 
the  fiscal  year  correspond  with  the  calendar  year;  but  in 
many  cases  it  is  preferable  to  have  the  fiscal  year  end  at  a 
time  when  business  is  slack,  or  when  the  inventory  can  be 
taken  with  the  least  labor.  In  the  dry-goods  business,  for 
instance,  the  fiscal  year  might  be  made  to  close  just  before 
the  fall  merchandise  comes  in,  when  the  stock  is  low,  so  that 
the  physical  inventory  may  be  taken  with  comparative  ease. 
Under  the  modern  plan  of  keeping  perpetual  or  book  inven- 
tories, however,  a  physical  inventory  is  not  necessarily  taken 
before  closing  the  books,  and  the  end  of  the  fiscal  year  is 
usually  made  to  coincide  with  the  end  of  the  calendar  year. 

At  the  closing  date  it  is  the  practice  to  prepare  such 
statements,  usually  profit  and  loss  statement  and  balance 
sheet,  as  will  clearly  exhibit  the  business  operations  of  the 
company  for  the  year  and  also  show  its  true  financial  con- 
dition at  the  time. 

Financial  statements  do  not,  however,  in  themselves 
necessitate  a  closing  of  the  books,  and  they  are  frequently 
made  up  monthly,  quarterly,  or  half-yearly  for  the  purpose 
of  supplying  information  which  the  officers  and  directors 

320 


CLOSING  THE   BOOKS  321 

need  before  the  time  of  the  annual  closing.  This  does  not 
mean  that  the  ledger  is  closed,  or  changes  made  in  any  of 
the  accounts,  but  simply  that  the  required  balances,  inven- 
tory totals,  and  accrued  items  are  compiled  from  the  books 
and  records  as  they  stand,  and  are  presented  in  condensed 
form  to  the  corporation  officials.  A  complete  profit  and  loss 
statement  can  be  made  each  month  with  but  little  extra 
work,  provided  a  running  inventory  is  maintained  in  the 
records.  In  many  companies,  however,  it  is  the  practice  to 
make  adjusting  entries  each  month  to  bring  the  ledger  into 
harmony  with  the  monthly  profit  and  loss  statement  and 
balance  sheet.  In  that  case  all  prepaid  and  accrued  items, 
as  interest,  insurance,  taxes,  etc.,  must  be  considered.  The 
distribution  of  overhead  expenses  is  also  a  feature  of  great 
importance  in  the  case  of  manufacturing  establishments. 

§  280.    Procedure  in  Closing  the  Books 

The  steps  to  be  taken  in  closing  the  books  are  briefly  as 
follows : 

1.  Determine  the  inventories  of  merchandise,  proper- 
ties, supplies,  etc.,  making  adjustments  where  necessary, 
and  enter  them  in  the  proper  respective  accounts. 

2.  Compute  and  group  prepaid  and  accrued  items  and 
make  entries  to  the  proper  accounts. 

3.  Determine  depreciation  of  properties  and  make 
entries  for  same. 

4.  Consider  and  enter  reserves  of  whatever  nature. 

5.  Close  the  nominal  accounts  into  Profit  and  Loss 
account,  usually  by  journal  entry.  Journal  entries  may  be 
used  also  for  the  entering  of  inventories  and  accruals.  The 
net  profit  or  net  loss  is  then  carried  to  Surplus  account  or  to 
Undivided  Profits  account. 

6.  Balance  and  rule  the  nominal  accounts  and  bring 
down  the  inventories  wher?  necessary. 


322 


REPORTS   AND   STATEMENTS 


7.  Make  a  second  trial  balance  of  the  ledger.  This 
would  now  consist  only  of  assets  and  liabilities  and  the 
balance  of  the  Profit  and  Loss  account. 

8.  Prepare  income  and  profit  and  loss  statement  show- 
ing gross  and  net  profit,  accompanied  by  analyses  and  per- 
centages when  desired.  Show  comparisons  of  items  with 
like  items  from  preceding  years  where  desirable. 

9.  Prepare  balance  sheet  showing  the  company's  net 
worth  and  financial  condition.  Show  comparisons  with 
assets  and  liabilities  of  preceding  years  where  desirable. 

ID.  Prepare  other  exhibits,  schedules,  or  summaries 
as  required. 

II.  Contingent  assets  or  liabiUties  should  be  noted,  at 
least  as  a  footnote  to  the  balance  sheet,  and  adjustments 
made  where  necessary, 

§  281.    Closing  the  Ledger 

The  ledger  must  be  closed  systematically  with  the 
various  nominal  or  profit  and  loss  accounts  properly  sub- 
divided. For  example,  all  accounts  directly  affecting  pro- 
duction costs  should  be  closed  into  the  Manufacturing 
account,  in  order  to  determine  the  exact  cost  of  the  finished 
stock;  and  all  selling  expenses,  administrative  expenses,  etc., 
should  be  carefully  classified  and  closed  in  accordance  with 
the  degree  of  information  required  and  the  plan  of  the 
bookkeeping  system.  The  net  profit  must,  of  course,  be 
clearly  stated,  and  sometimes  the  gross  profit  as  well.  It  is 
not  necessary  to  close  the  real  or  asset  and  liability  accounts, 
except  when  they  are  balanced  by  settlement  or  adjustments, 
or  when  forwarding  them  to  another  page  or  to  another 
ledger. 

Monthly  trial  balances  should,  of  course,  be  made  of  all 
ledgers,  and  the  main  ledger  be  in  balance  before  it  is  closed. 

Wh?n  dosing  the  ledger,  transfers  of  the  nominal  ac- 


CLOSING   THE   BOOKS  323 

counts  to  the  manufacturing  accounts  and  to  the  Profit  and 
Loss  account  are  usually,  though  not  necessarily,  made  by 
journal  entry.  Transfers  might  be  made  directly  on  the 
face  of  the  ledger  without  supporting  journal  entries  or 
explanation,  but  it  is  preferable  to  make  such  transfers 
through  the  journal;  this  summarizes  all  of  the  items  and 
provides  a  means  of  supporting  each  ledger  entry  by  ade- 
quate explanation.  The  journal  explanations  may  be  very 
brief,  but  should  be  clear  and  unmistakable  for  the  benefit  of 
others  who  may  have  to  make  reference  thereto. 

It  is  in  closing  the  ledger  preparatory  to  the  making  of 
the  statements  that  many  of  the  more  difficult  problems  of 
accounting  arise.  With  this  in  view,  the  following  sections 
have  been  devoted  to  a  brief  discussion  of  most  of  these 
points. 

The  methods  of  handling  the  accounts  peculiar  to  cor- 
porations when  preparing  statements  have  already  been 
treated  in  considerable  detail  (see  especially  Chapter  VI, 
"Distinctive  Corporate  Accounts"),  so  that  discussion  of 
them  has  been  omitted  in  this  chapter. 

Reserve  Funds 
§  282.    Reserve  Accounts 

Reserves  represent  profits  set  aside  for  definite  and 
specific  purposes.  The  prudent  business  man  is  careful  not 
to  overstate  his  profits,  and,  to  prevent  this,  due  allowance 
is  made  in  the  form  of  reserves  to  meet  any  anticipated  or 
expected  losses.  They  include  all  amounts  reserved  or  kept 
back  for  future  use,  as  reserve  for  bad  debts,  reserve  for 
depreciation,  reserve  for  discounts,  reserve  for  insurance  or 
sick  benefits,  reserve  for  sinking  fund,  etc.  For  instance,  it 
is  a  well-known  fact  that  customers'  accounts  are  frequently 
uncollectible,  and  exj>erience  has  shown  the  advisability  of 
making  due  allowance   for  such  los§es,     The   following^ 


324 


REPORTS   AND   STATEMENTS 


reserve  for  bad  debts,  against  which  worthless  accounts  may 
be  charged  directly  as  they  occur  or  at  the  end  of  the  year 
through  the  Bad  Debts  account,  illustrates  the  working  of  a 
reserve  account. 

Reserve  for  Bad  Debts 


I9I6 
Dec.  31 

Bad    Debts 
written   off 
during  the 
year     and 
charged  to 
Bad  Debts 

1916 
Jaa      I 
Dec.  31 

Balance 

Profit  and  Loss 

$3,680.29 
3,291-40 

«      « 

account  

Balance 

$3,468.75 
3,502.94 

1917 
Jan.      I 

Balance 

$6,971 

.69 

$6,971.69 

$3,502.94 

§  283.    Reserve  Accounts  and  Reserve  Funds 

When  profits  are  reserved  for  a  particular  purpyose,  and 
specific  funds  or  property  are  set  aside  or  invested  to  meet 
the  needs  of  this  reserve,  a  reserve  fund  is  thereby  created. 
Thus,  if  a  reserve  is  created  for  the  redemption  of  bonds  or 
for  the  replacement  of  a  wasting  asset,  by  the  reservation  of 
cash,  or  by  the  investment  of  cash  in  securities,  the  cash  or 
securities  being  held  for  the  specific  purpose  of  redeeming 
the  bonds,  the  result  is  a  sinking  fund  or  replacement  fund, 
as  the  case  may  be.  If,  however,  a  reserve  is  created  for  the 
redemption  of  bonds  by  a  charge  against  Surplus  or  Profit 
and  Loss,  but  no  actual  reservation  of  cash  or  other  property 
is  made,  the  result  is  a  sinking  fund  reserve.  Im  the  one 
case  the  actual  cash  is  withdrawn  and  held,  and  it,  or  its 
equivalent  if  it  is  invested,  is  there  for  the  redemption  of  the 
bonds  as  they  fall  due.    In  the  other  case,  the  profits  have 


RESERVE  FUNDS  325 

been  withdrawn  from  Surplus  or  Profit  and  Loss,  as  the 
case  may  be,  so  that  they  cannot  be  declared  in  dividends 
or  diverted  to  other  uses. 

This  being  so,  when  the  bonds  fall  due,  their  redemption 
will  not  impair  the  capital  or  reduce  the  surplus,  because  of 
the  reserve ;  but  this  is  all  the  reserve  does,  and  the  directors 
must  then  take  such  steps  as  may  be  necessary  to  secure  cash 
to  pay  the  bonds.  Sufficient  cash  may  perhaps  be  in  the 
treasury  for  the  purpose,  but,  in  the  case  of  a  large  amount 
of  bonds  or  an  entire  issue  falling  due,  this  is  seldom  the 
case;  as  a  result  cash  must  be  borrowed  or  be  secured  by 
the  sale  of  some  of  the  company's  property  to  meet  redemp- 
tive needs.  For  this  reason,  to  provide  for  the  redemption 
of  bonds  or  the  liquidation  of  any  heavy  obligation,  the 
reserve  fund,  or  both  fund  and  reserve  are  generally  set  up. 

Reserve  accounts  are  in  the  nature  of  liabilities  and  are 
always  shown  on  the  balance  sheet  as  credits,  or  as  a  deduc- 
tion from  assets,  while  funds  of  whatever  nature  are  assets 
and  therefore  appear  on  the  debit  side  or  otherwise  as  a 
deduction  from  liabilities.  Loss  of  assets  for  which  re- 
serves have  been  provided  is  written  off  by  a  debit  to  the 
reserve  and  a  credit  to  the  specific  asset.  An  examination 
of  the  balance  sheets  appearing  in  Chapters  XXV,  XXVI 
will  show  the  different  reserve  accounts  and  the  manner  of 
handling  them. 

§  284.    Secret  and  Hidden  Reserves 

The  terms  "hidden  reserves"  and  "hidden  assets"  are 
practically  synonymous  with  "secret  reserves."  The  latter 
term  is  familiar  to  accountants  as  representing  the  excess  of 
actual  net  worth  of  a  concern  over  and  above  the  amount 
indicated  on  its  balance  sheet.  For  some  reason,  the  direc- 
tors may  not  wish  to  disclose  in  a  financial  statement  the 
true  status  of  the  company's  condition,  and  they  act  accord- 


326 


REPORTS   AND   STATEMENTS 


ingly  in  understating  the  true  facts.  This  may  be  due  to  a 
spirit  of  conservatism  which  is  no  doubt  permissible  in  case 
no  one  is  injured  thereby.  Sometimes,  however,  the  actual 
net  profits  for  a  given  year  are  understated  for  the  purpose 
of  lessening  the  state  and  federal  corporation  tax,  and  per- 
haps to  keep  both  stockholders  and  competitors  in  ignorance 
of  the  company's  actual  earnings. 

Following  are  various  acts  or  omissions  which  result  in 
the  creation  of  secret  reserves : 

1.  Intentionally    or    inadvertently    omitting    assets 

which  should  be  included. 

2.  Undervaluing  assets,  intentionally  or  otherwise. 

3.  Writing  off  too  much  depreciation. 

4.  Charging  additions  and  improvements  to  Repairs 

or   Maintenance   account  instead   of  to   Plant 
account, 

5.  Creating  reserves  for  bad  debts  in  excess  of  the 

amount  required. 

6.  Charging  production  costs  intentionally  or  other- 

wise, to  general  expense  instead  of  to  the  manu- 
factured article,  thus  undervaluing  the  cost. 

7.  Including  fictitious  liabilities  in  the  accounts,  or 

overstating  actual  liabilities. 

8.  Making  additions  or  improvements  and  charging 

the  cost  to  Surplus  account,  thereby  hiding  their 
value. 

9.  Neglecting  to  take  into  consideration  in  the  ac- 

counts natural  increases  in  value  of  real  or  other 
property. 
10.    Understating  values  in  good  years  and  increasing 
them  in  lean  years  as  a  means  of  keeping  the 
dividends  uniform  from  year  to  year. 

The  hidden  reserve  is  a  commendable  creation  in  case  it 


RESERVE   FUNDS  327 

is  not  carried  to  excess  and  provided  it  is  not  detrimental  to 
interested  persons.  The  spirit  of  conservatism,  to  a  reason- 
able extent,  is  to  be  commended  by  the  accountant  rather 
than  criticized.  If,  however,  stockholders  are  kept  in  igno- 
rance of  secret  reserves  of  considerable  amount,  the  auditor 
should  draw  attention  to  this  fact  in  his  report. 

§  285.    Depreciation 

Depreciation  is  the  reduction  in  the  value  of  a  fixed 
asset  through  use,  the  passage  of  time,  or  obsolescence.  All 
property,  with  the  possible  exception  of  land,  must  inevi- 
tably reach  the  end  of  its  usefulness,  since  disintegration  is 
the  law  of  nature.  Machinery  in  use  suffers  from  wear  and 
tear.  Machinery  not  in  use  is  subject  to  depreciation  from 
rust  and  decay.  Whether  in  use  or  not,  the  onward  march 
of  invention  and  improvement  in  mechanical  lines,  together 
with  the  necessity  of  meeting  sharp  competition  in  business, 
requires  that  machinery  shall  be  modern  in  every  respect. 
Accordingly,  obsolete  machinery  must  be  replaced  by  mod- 
ern equipment. 

In  the  case  of  machinery  or  equipment  designed  for 
manufacturing  purposes,  depreciation  is  considered  a  part 
of  the  cost  of  production. 

§  286.    Methods  of  Handling  Depreciation 

There  are  several  methods  of  handUng  depreciation  on 
the  books.  Since  it  is  not  possible  to  determine  the  exact 
rate  at  which  properties  will  depreciate,  it  becomes  necessary 
to  follow  the  results  of  past  experience.  From  this  it  is 
possible  to  determine  with  reasonable  certainty  the  life  of  a 
given  property;  and  the  rates  of  depreciation  may  then  be 
approximated. 

The  methods  more  commonly  employed  in  caring  for 
depreciation  are  as  follows : 


^28  REPORTS   AND   STATEMENTS 

1.  Even  portions  of  the  original  value  are  charged  off 

each  year. 

2.  An  annual  per  cent  of  the  diminishing  value  is 

charged  off  each  year. 

3.  Depreciation  is  offset  by  improvement  and  mainte- 

nance charges. 

The  life  of  machinery  is  from  five  to  twenty  years,  de- 
pending upon  the  usage  to  which  it  is  subjected.  It  is  mani- 
fest that  the  rate  on  diminishing  values  must  be  higher  than 
the  rate  on  the  original  value.  If  a  machine  is  likely  to  run 
for  twenty  years,  then  a  fair  rate  of  depreciation  would  be 
5%  on  the  original  cost  and  from  7  to  10%  on  the  diminish- 
ing balance.  The  method  of  diminishing  values  seems  the 
more  logical  of  the  first  two  methods  of  caring  for  deprecia- 
tion, since  the  burden  is  distributed  more  equitably  and  the 
property  has  a  residual  value  at  all  times.  It  throws  the 
heaviest  charge  for  depreciation  on  the  first  few  years  when 
the  machinery  is  in  good  condition,  and  then  gradually 
decreases  as  the  efficiency  of  the  property  is  impaired.  On 
the  other  hand,  the  repairs  during  the  last  years  are  larger 
than  at  the  beginning,  so  that  the  annual  deduction  from 
profits  is  not  unequally  distributed. 

All  repairs  should,  of  course,  be  charged  to  Repairs 
account  and  then  closed  into  Profit  and  Loss  account,  or 
perhaps  treated  as  a  manufacturing  cost.  Additions  and 
permanent  improvements  should  be  charged  to  the  property 
account  benefited  thereby,  and  be  subjected  to  the  same 
process  of  depreciation  as  the  original  property.  There  are 
very  few  cases,  if  any,  where  repairs  and  improvements  can 
take  the  place  of  an  ample  provision  for  depreciation. 

The  rates  of  depreciation  on  different  kinds  of  properties 
have  been  carefully  compiled  by  engineers  and  accountants, 
and  depreciation  tables  have  been  worked  out  from  these 
calculations,  which  will  be  found  convenient. 


RESERVE   FUNDS 


329 


The  first  method  of  depreciation  requires  no  illustration. 
The  following-  account  will  show  the  application  of  the 
second  method. 


Machinery  Account 

(10%  Depreciation  off  Diminishing  Values  Annually) 


1915 
Jan.  I     Investment  .  . .  .$100,000.00 


1916 
Jan.  I     Balance 


1917 
Jan.  I     Balance 


$100,000.00 


$  90,000.00 


$90,000.00 


$  81,000.00 


1915 
Dec.  3.1     Depreciation. .  $10,000.00 
Balance  90,000.00 


$100,000.00 


1916 
Dec.  31     Depreciation..  $  9,000.00 
Balance  81,000.00 


$90,000.00 


This  process  is  continued  from  year  to  year  until  the 
value  of  the  machinery  is  consumed,  or  it  is  sold  or  dis- 
carded. If  the  depreciation  proves  too  high  or  too  low, 
modification  of  the  percentage  rate  used  or  other  adjust- 
ments may  be  necessary. 

If  statements  are  required  each  calendar  month,  necessi- 
tating a  distribution  of  depreciation,  it  will  be  necessary  to 
make  an  entry  each  month  debiting  Depreciation  and  cred- 
iting the  property  account  for  one-twelfth  of  the  annual 
amount  to  be  written  off.  In  lieu  of  this  process,  a  good 
plan  is  to  make  entries  only  at  the  end  of  the  year  for  the 
amount  to  be  written  off,  while  the  monthly  distribution  is 
made  on  separate  analysis  sheets.  In  this  way  the  informa- 
tion required  for  monthly  statements  can  be  compiled  on 
loose  sheets  without  affecting  the  ledger  accounts  or  necessi- 
tating so  many  journal  entries. 


330 


REPORTS   AND   STATEMENTS 


§  287.    Reserve  for  Depreciation 

Instead  of  writing  down  the  property  account  from  year 
to  year,  a  more  generally  approved  plan  of  entering  depre- 
ciation on  the  books  is  to  set  up  a  "Reserve  for  Deprecia- 
tion." It  is  credited  each  year  or  each  month  with  the 
amount  to  be  written  off,  while  a  corresponding  charge  is 
made  to  Profit  and  Loss,  to  Operating  Expense,  or  to  De- 
preciation account.  It  is  apparent  that  under  this  method 
the  property  account  remains  on  the  books  at  its  cost  value, 
while  the  corresponding  reserve  account  stands  as  an  open 
credit  on  the  books  and  in  the  trial  balance.  This  is  more 
satisfactory  than  a  direct  credit  to  the  property  account, 
since  it  shows  at  any  time  the  book  accounts  of  properties 
at  their  cost  price,  and  the  depreciation  reserves  set  up 
against  them. 

Where  properties  are  written  down  very  rapidly  by 
actual  credits  to  the  property  account,  it  is  hard  to  convince 
the  insurance  adjuster,  in  case  of  loss  by  fire,  that  they  are 
really  worth  more  than  the  balances  shown  in  the  accounts. 
Of  course,  it  is  not  assumed  that  either  the  corporation  offi- 
cials or  the  insurance  ad  juster  would  be  influenced  by  the 
account  alone  without  an  investigation  of  the  facts ;  yet  it  is 
nevertheless  a  difficult  matter  to  show  that  properties  are 
really  worth  more  than  the  owner  has  actually  valued  them 
in  his  book  accounts.  While  the  property  and  reserve  ac- 
counts are  shown  separately  in  the  books,  in  the  balance 
sheet  the  reserve  for  depreciation  is  frequently  deducted 
from  the  property,  thus : 

Plant  and  Machinery $100,000.00 

Less  Reserve  for  Depreciation .        10,000.00     $90,000.00 

§  288.    Operation  of  Reserve  for  Depreciation  Account 
A  general  reserve  account  may  be  opened  for  deprecia- 


RESERVE   FUNDS  231 

tion  of  all  properties,  or  a  separate  reserve  account  may  be 
opened  for  each  class  of  property.  This  depends,  of  course, 
upon  the  different  kinds  of  properties  to  be  depreciated  and 
on  the  plans  of  the  supervising  accountant.  It  should  be 
remembered  that  reserves  are  not  surplus  profits,  but  merely 
negatives  to,  or  deductions  from,  the  corresponding  assets. 
Instead  of  deducting  these  depreciation  reserves  from  their 
corresponding  assets,  as  shown  in  the  illustration  above,  they 
are  frequently  placed  in  the  balance  sheet  among  the  liabili- 
ties. Any  addition  to  the  Machinery  account  will,  of  course, 
require  a  corresponding  increase  to  the  annual  reserve.  In 
case  a  machine  becomes  obsolete  and  is  discarded,  it  must 
be  charged  off  to  the  reserve  account  as  follows : 

Reserve   for  Depreciation $14,500 

To  Machinery  Account $14,500 

To  write  off  obsolete  and  worn-out  machinery 
as  follows:     (Here  give  details.) 

The  sale  of  old  machinery  or  of  scrap  necessitates  a 
debit  to  Cash  and  a  credit  to  Reserve  for  Depreciation  or  to 
Profit  and  Loss  account.  If  an  ample  depreciation  account 
is  maintained  for  all  properties,  any  machine  becoming  obso- 
lete or  worthless  before  the  time  estimated  should,  in  like 
manner,  be  written  off  against  Reserve  for  Depreciation. 
In  case  the  reserve  is  not  sufficient  to  offset  the  entire 
amount,  then  the  excess  must  be  charged  to  Profit  and  Loss. 
The  accountant  or  careful  corporation  official  will  see  that 
the  depreciation  reserve  is  maintained  at  an  amount  amply 
sufficient  for  every  purpose. 

§  289.    Sinking  Fund  for  Exhaustion  of  Mines 

In  the  ordinary  commercial  undertaking  the  profits  are 
made  on  the  turnover,  and  at  the  end  of  a  term  of  years  the 
investment — save  in  case  of  disaster — is  intact,  and  pre- 


232  REPORTS   AND   STATEMENTS 

sumably  the  business  is  far  more  valuable  than  when  it  was 
started.  In  mining  and  similar  undertakings,  however,  the 
profit  is  made  from  the  removal  of  the  mineral,  and  under 
ordinary  conditions  the  value  of  the  property  becomes 
steadily  less  with  each  ton  of  ore  removed,  until  on  its  final 
exhaustion  there  is  left  a  tract  of  rough  and  worthless  land 
and  machinery  of  but  little  further  value.  In  other  words, 
the  original  investment  has  disappeared — has  been  con- 
sumed, or  realized  upon,  in  the  course  of  operation. 

This  gradual  working  out  or  liquidation  of  the  original 
investment  is  characteristic  of  mining,  quarrying,  timbering, 
and  other  operations,  and,  if  the  conditions  are  clearly  rec- 
ognized, is  not  in  any  way  objectionable.  Frequently, 
however,  the  owners  prefef  to  establish  a  sinking  fund  or 
depreciation  reserve  that  will  preserve  the  integrity  of  the 
original  investment,  so  that  profits  only  will  be  paid  the 
owners  from  current  operation. 

The  establishment  of  such  a  sinking  fund,  or  "exhaus- 
tion" or  "replacement"  fund  as  it  is  frequently  called,  is  a 
comparatively  simple  matter.  The  amount  of  mineral  in 
the  mine,  or  of  timber  on  the  tract,  is  estimated;  and  a 
certain  amount  calculated  to  replace  the  original  investment 
upon  or  before  the  exhaustion  of  the  property,  is  reserved 
and  set  aside  for  each  ton  of  ore  mined,  or  for  each  thou- 
sand feet  of  lumber  cut.  For  instance,  the  Cambria  Steel 
Company  carries  a  "Reserve  for  Extinguishment  of  Min- 
erals" aggregating  some  $500,000;  the  Bethlehem  Steel 
Corporation  carries  a  "Reserve  for  Depreciation  of  Prop- 
erty, Exhaustion  of  Minerals,  etc.,"  of  over  $10,000,000; 
the  International  Harvester  Company  carries  a  "Reserve 
for  Plant  Depreciation  and  Extinguishment"  of  over 
$10,000,000;  and  the  United  States  Steel  Corporation  has 
reserves  for  similar  purposes  aggregating  over  $24,000,000. 

The  amount  reserved  for  exhaustion  or  replacement  is 


RESERVE   FUNDS  33^ 

deducted  from  profits  and  credited  to  a  special  reserve 
account ;  but,  since  the  creation  of  such  a  reserve  is  entirely 
at  the  option  of  the  owners,  the  actual  assets  may  remain 
in  the  business,  or,  if  preferred,  may  be  set  aside  in  cash  as 
a  special  exhaustion  fund.  If  cash  is  drawn  from  the  busi- 
ness to  provide  this  special  fund,  it  may  either  be  placed  in 
the  hands  of  a  trustee,  or  of  a  committee  of  directors,  or  of 
the  entire  board.  Unlike  a  bond  sinking  fund  where  the 
deed  of  trust  requires  cash  to  be  withdrawn,  the  exhaustion 
fund  is  generally  a  voluntary  matter  and  may  be  regulated 
as  seems  best  to  the  owners  of  the  property. 

§  290.    Insurance,  Benefit,  and  Accident  Funds 

The  creation  of  special  funds  and  reserves  for  insuring 
properties  against  loss  by  fire,  for  sickness  and  pensions,  for 
old  age  benefits,  and  against  accidents  and  other  contingen- 
cies, is  a  common  feature  of  modern  corporation  finance. 

The  United  States  Steel  Corporation  in  its  last  annual 
report  shows  reserves  on  the  liability  side  of  its  balance 
sheet  as  follows : 

Contingent  and  Miscellaneous  Operating  Funds 

Pension  Fund 

Insurance  Funds 

The  Pennsylvania  Railroad  Company  maintains  the 
following  funds,  the  purposes  of  which  are  apparent : 

Consolidated  Mortgage  Sinking  Fund 
Insurance  Fund  for  Fire,  Marine,  etc. 
Employees'  Voluntary  Relief  Fund 
Employees'  Saving  Fund 
Employees'  Pension  Fund 

The  International  Harvester  Company  in  its  annual 
report  shows  the  following  reserves  on  the  liability  side  of 
its  balance  sheet : 


234  REPORTS    AND    STATEMENTS 

Depreciation  and  Extinguishment 

Special  Maintenance 

Collection  Expenses  on  Receivables 

Fire  Insurance  Fund 

Pension  Fund 

Industrial  Accident  Fund 

Profit-Sharing 

Contingent  (European  War  Losses,  etc.) 

The  three  representative  corporations  cited  above  may 
be  taken  as  fair  examples  of  the  modern  practice  in  the  mat- 
ter of  creating  reserves  and  funds.  Except  in  a  few  of  the 
compulsory  cases,  the  reserves  are  not  represented  by 
specially  appropriated  assets,  thus  indicating  that  the  regu- 
lar cash  assets  are  relied  upon  to  meet  any  demands  made 
from  these  sources. 

Surplus 
§  291.    Surplus  or  Undivided  Profits  Account 

''Surplus"  account  usually  contains  all  those  profits  that 
are  not  reserved  for  some  special  purpose  or  which  are  not 
immediately  to  be  distributed  in  the  form  of  dividends.  Or, 
more  broadly,  it  is  the  account  in  which  is  entered  all  excess 
of  assets  over  liabilities  which  is  available  for  dividends  or 
other  general  purposes  of  the  company.  In  the  balance 
sheet  it  is  represented  by  the  excess  of  assets  over  liabilities 
and  capital,  the  diflference  being  a  credit  either  to  Surplus, 
or  to  Undivided  Profits,  or  sometimes  to  Profit  and  Loss. 
Where  a  surplus  exists,  it  is  usually  maintained  as  a  meas- 
ure of  safety  to  strengthen  the  financial  condition  of  the 
company  and  to  safeguard  it  against  unforeseen  contingen- 
cies. In  England  and  extensively  in  Canada,  the  surplus  is 
called  the  "Reserve  Fund." 

Surplus  account  may  be  credited  with  the  year's  net 


SURPLUS 


335 


profit  before  the  dividend  is  declared,  or  with  the  portion 
of  profits  to  be  retained  in  the  business  after  payment  of 
dividends.  Dividends  are  usually  not  declared  until  the 
amount  of  net  profit  is  known,  unless  the  unapportioned 
surplus  is  ample  to  cover  any  shortage  that  might  result; 
to  do  otherwise  might  result  in  wiping  out  the  reserve  that 
had  been  created  during  prosperous  years.  A  large  sur- 
plus is  the  pride  of  every  well-managed  corporation,  and 
especially  of  banking  institutions  in  which  the  surplus  is 
frequently  larger  than  the  capital  stock  itself. 

Banks  usually  make  a  distinction  between  surplus  and 
undivided  profits.  Each  year  they  carry  a  given  amount  of 
the  net  profit  to  Surplus  account  to  serve  as  permanent 
working  capital,  while  the  remainder  after  payment  of  divi- 
dends is  carried  in  the  Undivided  Profits  account.  Many 
corporations  make  no  distinction  but  use  either  one  or  the 
other  for  all  purposes.  Some  use  "Surplus  and  Undivided 
Profits"  account,  or  "Surplus  and  Deficiency"  account, 
while  others  use  only  the  Profit  and  Loss  account. 

The  Surplus  account  is  frequently  entitled  "Surplus  and 
Deficiency"  account,  in  order  that  it  may,  without  misnomer, 
not  only  accommodate  surplus  but  any  deficiency  as  well. 
This  is  the  plan  used  by  public  service  commissions  in  their 
schedules  and  reports.  The  account  is  credited  with  surplus 
profits  and  charged  with  such  net  loss  as  may  result  in  any 
year.  A  debit  excess  of  this  account,  of  course,  represents 
a  deficiency  or  impairment  of  capital,  while  a  credit  excess 
is  the  opposite. 

§  292.    Contributed  Surplus 

Sometimes  stock  is  subscribed  for  at  a  figure  above  its 
par  value,  and  a  surplus  is  thus  created  by  contribution  at 
the  time  the  company  is  organized.  This  is  done  in  order 
that  the  company  may  have  a  safety  fund  for  emergencies, 


336  REPORTS   AND   STATEMENTS 

or  additional  working  capital  while  the  business  is  being 
launched.  In  that  case  Surplus  account  is  usually  credited 
for  the  amount  contributed  in  excess  of  the  capital  stock. 
This  plan  is  commonly  employed  in  the  organization  of 
national  banks  in  which  the  stockholders  are  liable  for  debts 
of  the  company  to  an  amount  equal  to  the  stock  they  hold. 
The  practice  is  to  sell  the  stock  at,  say,  $125,  $150,  or  even 
$200  per  share,  in  which  case  the  double  liability  of  the 
stockholders  is  completely  provided  for  and  the  institution 
itself  secures  a  material  addition  to  its  working  capital. 

Surplus  is  sometimes  the  result  of  a  direct  acquisition  of 
value  not  belonging  to  the  fiscal  period  or  to  the  opening  of 
business,  as  an  increase  in  value  of  real  estate,  of  invest- 
ments, or  of  other  assets  of  a  permanent  nature.  If  such 
increase  is  permanent,  it  may  legitimately  be  credited  to 
Surplus  account.  Property  value  increases,  however,  if 
used  for  the  purpose  of  creating  a  fictitious  surplus  on 
which  to  declare  dividends,  should  be  severely  condemned 
by  accountants  and  corporation  officials.  It  is  not  good 
business  prudence  in  any  case  to  use  appreciation  of  values 
for  dividend  purposes.  Dividends  declared  and  paid  on  the 
strength  of  fictitious  profits  must,  as  a  rule,  be  accounted 
for  in  case  of  the  company's  failure ;  it  is  equivalent  to  pay- 
ing dividends  out  of  capital  for  which  the  directors  are  held 
personally  liable. 

§  293.    Investments  of  Surplus 

It  is  common  practice  for  corporations  to  invest  part  of 
their  surplus  cash  in  gilt-edged  securities,  such  as  bonds  and 
stocks  of  other  companies.  This  insures  the  company 
against  danger  of  being  without  liquid  funds  in  case  of  a 
crisis ;  but,  on  the  other  hand,  when  the  low  rate  of  return 
from  these  securities  is  considered,  it  is  manifest  that  the 
money  thus  invested  could  be  used  more  profitably  in  the! 


SURPLUS  337 

business.  However,  most  corporations  follow  the  practice 
of  investing  in  such  securities,  knowing  that  they  can  be 
used  at  any  time  as  collateral  for  securing  bank  loans  or 
for  sale  on  the  stock  exchange. 

It  should  be  remembered  that  any  "surplus"  is  always 
represented  by  an  equivalent  of  assets,  but  as  a  rule  these 
assets  are  not  earmarked  or  in  any  way  designated  except 
perhaps  as  investments.  In  case  a  special  surplus  fund  is 
created  by  setting  aside  cash,  an  account  must  be  opened 
under  the  caption  "Surplus  Fund"  or  "Investments,"  or  any 
other  designating  term.  Such  outside  investments  may, 
but  generally  do  not,  represent  all  of  surplus  profits.  Sur- 
plus account  always  shows  a  credit  balance  (unless  a  deficit 
occurs),  while  the  surplus  fund  (or  any  other  fund)  shows 
a  debit  balance.  Income  from  surplus  funds  invested  should, 
of  course,  be  credited  to  Income  account 


CHAPTER    XXIV 

FORMS    OF    STATEMENTS 

§  294.    Corporate  Reports 

There  are  two  types  of  corporate  reports  and  statements : 
those  rendered  by  the  directors  and  corporate  officials  to  the 
stockholders  and  governmental  authorities,  and  those  ren- 
dered by  the  accounting  department  of  the  corporation  to 
the  executives.  It  is  to  the  latter  class  that  the  present  dis- 
cussion will  be  directed. 

§  295.    Necessity  for  Reports 

To  manage  the  business  intelligently  it  is  essential  that 
corporate  officials  be  constantly  informed  as  to  the  financial 
status  and  progress  of  the  concern.  In  the  case  of  the  small 
corporation  where  the  executives  are  in  intimate  touch  with 
the  daily  activities  of  the  business,  monthly  or  even  quar- 
terly statements  of  income  and  profit  and  loss,  and  balance 
sheets  are  adequate  to  give  them  sufficient  information  to 
run  the  business  properly. 

In  the  case  of  the  large  corporation,  however,  where  the 
scope  of  activity  and  the  volume  of  business  is  such  that  it 
is  absolutely  impossible  for  the  executive  to  keep  in  close 
personal  touch  with  the  various  details  of  the  business,  it 
is  the  duty  of  the  accounting  department  to  provide  suitable 
statements  and  statistical  data  to  keep  him  thoroughly 
informed.  In  an  organization  of  this  type  it  may  be  neces- 
sary to  have  daily  reports  showing  in  memorandum  form 
the  essential  facts  of  the  business  such  as  the  sales,  pur- 

338 


FORMS   OF   STATEMENTS  339 

chases,  collections,  expenditures,  bank  balances,  manufac- 
turing* or  operating-  details;  weekly  or  monthly  statements 
of  cash  receipts  and  disbursements;  monthly  statements  of 
income  and  profit  and  loss,  and  balance  sheets,  together 
with  such  other  statistical  information  as  may  be  needed.* 

§  296.    Form  of  Statements 

While  there  are  no  generally  accepted  or  standard  forms 
for  corporate  statements,  those  given  on  the  following  pages 
are  fairly  representative  of  the  best  practice.  Modifications 
may  often  prove  desirable  to  meet  the  needs  of  local  condi- 
tions, but,  when  making  these  modifications,  the  accountant 
must  be  most  careful  to  see  that  the  statements  as  rendered 
will  not  be  misleading  to  anyone,  and  that  they  convey 
information  to  those  who  will  use  them  in  as  interesting  and 
clear  a  manner  as  possible.  The  forms  given  in  Chapters 
XXV,  XXVI,  in  connection  with  the  problems  illustrating 
the  preparation  of  corporate  statements,  are  suggestive  of 
modifications  that  are  good. 

§  297.    Balance  Sheets 

Balance  Sheet,  December  31,  19.., 

Assets 
Current  Assets : 
Cash $ 


Notes  and  Accounts  Receivable. 
Inventories   


Deferred  Charges  to  Operation ; 
Prepaid  Insurance,  etc 


Plant  Assets: 

Real  Estate $. 

Machinery,  Fixtures,  etc 


*For  further  details,  see  "Accounting  Practice  and  Procedure"    by  Dickinson, 
and  "Auditing — Theory  and  Practice"  by  Montgomery. 


340 


REPORTS    AND    STATEMENTS 


Other  Assets: 

Good-Will   Patents,  etc $. 


Liabilities 
Current  Liabilities.  : 

Notes    Payable $ 

Accounts    Payable 

Accrued  Wages $. 


Fixed  Liabilities ; 

Bonded   Debt. . . 

Reserves  


Excess  of  Assets 
(Or  Net  Worth) 

Capilal   Stock $ 

Surplus  (or  Deficit) $. 


Comparative  General  Balance  Sheet 

A.T  December  31,  19..,  and  at  December  31,  19.. 

December   December    Increases 
31,  19. .      31,  19. .    Decreases* 
Assets  and  Deferred  Debit  Items: 
Capital  Assets  : 

Land   $ $ $ 

Factory  and  Office  Buildings 

Building  Equipment 

Power  Plant 

Machinery  and  Tools 

Experimental    and    Improvement 

Plant 

Maintenance  Plant 

Printing  Plant 

Transportation  Plant 

Furniture  and  Fixtures 

Trade-Marks  and  Patents 


Total  Capital  Assets $. 


'Decreases  are  shown  in  red. 


FORMS   OF    STATEMENTS  34I 

Comparative  General  Balance  Sheet — Continued 

December   December    Increases 

31,  19- .       Ji.  19- .    Decreases* 
Working  and  Trading  Assets: 

Working : 

Goods  in  Process — Inventory $ $ $ 

Manufacturing  Materials  and  Sup- 
plies— Inventory    

Materials  for  Repairs  and  Main- 
tenance— Inventory 

Scrap  Material — Inventory 

Shipping  Material — Inventory '. 

Coal,  Oil,  and  Waste — Inventory 

Advertising   Matter 

Stationery  and  Printing 


Trading : 
Finished  Goods — Inventory. 


$. 


Total  Working  and  Trading. 


Total     Capital     and     Working     and 
Trading  Assets 

Current  Assets: 

Cash  in  Banks  and  in  Office 

Special  Deposits 

Notes  Receivable 

Customers'  Accounts  Receivable 

Claims  against  Transportation  Cos.. 
Advances  to  Employees 


Total  Current  Assets. 


Deferred  Debit  Items  : 

Fire  Insurance  Premiums,  unex- 
pired portion $ $. 

Freight  and  Cartage  Outward,  ap- 
plicable to  goods  finished,  ware- 
housed, and  unsold 


Total  Deferred  Debit  Items. 


*  Decreases  are  shown  in  red. 


242  REPORTS   AND   STATEMENTS 

Comparative  General  Balance  Sheet — Continued 

Decembef   December    Increases 
31,  19. .       31,  19. .    Decreases* 
Total    Current   Assets   and    Deferred 
Debit  Items $ $ $ 


Total     Assets     and     Deferred     Debit 
Items   

Liabilities  and  Surplus.' 
Capital  Liabilities  : 

Capital     Stock    Authorized,    Issued 
and  Outstanding 

Real  Estate  Bond  and  Mortgage... 


Total   Capital   Liabilities. 


Current  Liabilities  : 

Notes  and  Loans  Payable $. 

Accounts  Payable : 

(a)  To  Creditors 

(b)  "     Employees — Wages    Ac- 

crued   

(c)  "     Salesmen — Salaries,  Com- 

missions and  Expenses. 

(d)  "    Employees — Profit    Shar- 

ing Scheme 

(e)  "    Employees — Deposits    for 

Use  of  Tools 

(f)  "     State— For  Taxes 


Total  Current  Liabilities. 
Total    Liabilities 


Surplus  : 

(a)  Appropriated: 

For     Reserves     for     Claims 
against     Transportation 

Companies   $ $. 

For   Reserves   for   Deprecia- 
tion of  Physical  Assets 


'Decreases  are  shown  in  red. 


FORMS    OF    STATEMENTS  ,43 

Comparative  General  Balance  Sheet — Continued 

December   December    Increases 
31,  19..      31,  91..    Decreases* 
For   Possible  Losses   of  Ac- 
counts  Receivable 


Total  Appropriated 

(b)  Available  for  Dividends 


Total  Surplus. 


Total  Liabilities  and  Surplus $ $. 


§  298.    Statements  of  Income  and  Profit  and  Loss 

Statement  of  Income  and  Profit  &  Loss 
For  the  Year  Ended  December  31,  19. . 
Sales  $. 


Less  Returns. 


Net  Sales $. 

Deductions  from  Sales : 

Allowances $ 

Outward  Freight  and  Cartage 


Income  from  Sales $. 

Manufacturing  Cost  of  Goods  Sold : 

Purchases  of  Raw  Materials $ 

Inward  Freight  and  Cartage 


$■ 
Add — Decrease  in  Inventory  of  Raw  Material. . 


Direct  Labor 

Superintendence 

Factory  Office  Salaries. . 
Heat,  Light,  and  Power. 
Factory   Supplies 


'Decreases  shown  In  red. 


344  REPORTS   AND    STATEMENTS 

Statement  of  Income  and  Profit  &  Loss — Continued 

Factory  Expense 

Factory  Repairs 

Depreciation  of  Operating  Equipment 


Deduct — Increase    in    Inventory    of    Goods    in 
Process  

Total  Manufacturing  Cost 

Add — Decrease  in  Inventory  of  Finished  Goods 

Total  Manufacturing  Cost  of  Goods  Sold. .. 


Gross  Profit  on  Sales $. 

Selling  Expense : 

Salaries  of  Sales  Manager  and  Clerks $ 

Salaries  of  Salesmen 

Salesmen's   Commissions 

Traveling  Expense 

Advertising 


Selling  Profit 

Administrative  Expense : 

Salaries  of  Officers 

Salaries  of  Clerks 

Stationery  and  Printing 

Postage  

Telephone  and  Telegraph 

General  Expense 

Net  Profit  on  Sales — Income  from  Operations. 
Other  Income : 

Income  from  Securities 

Interest  on  Notes  Receivable 

Cash  Discount  on  Purchases 


Total  Income $. 

Deductions  from  Income: 

Interest  on  Bond  and  Mortgage  Payable $ 

Interest  on  Notes  Payable 

Cash  Discount  on  Sales 

Insurance 


FORMS   OF    STATEMENTS  ■  345 

Statement  of  Income  and  Profit  &  Loss — Continued 


Taxes 


Net  Income — Profit  and  Lxiss 

Profit  and  Loss  Credits : 

Profit   on    Purchase    of    Consolidated    Trading 

Company  6%  Bonds 

Profit  on  Purchase  of  National  Products  Com- 
pany 6%  Bonds 


Profit  and  Loss — Gross  Surplus  for  the  Period 

Profit  and  Loss  Charges: 

Provision  for  Depreciation  of  Buildings $. 

Provision  for  Contingencies 


Profit  and  Loss  for  the   Period 

Profit  and  Loss  Surplus  at  Beginning  of  Period. 


Profit  and  Loss  Surplus  Before  Deducting  Dividends. 
Dividends  Declared 


Profit  and  Loss  Surplus,  December  31,  19, 


Statement  of  Income  and  Profit  and  Loss 
For  the  Year  Ended  December  31,  19. . 

Income  from  Sales: 

Gross  Sales $ 

Less  Returns 


Net  Sales $. 


Deductions  from  Sales: 
Allowances  to  Customers: 

On  Sale  Price 

On  Damaged  Goods 

Freight  and  Cartage  Outward — on  Sales 

Stable    and    Automobile    Expense — Proportion 

Applicable  to  Sales 


Total  Deductions  from  Sales $. 


Income  from  Sales............ $. 


346 


REPORTS    AND    STATEMENTS 


Statement  of  Income  and  Profit  &  Loss — Continued 
Cost  of  Goods  Sold: 

Manufacturing  Cost  of  Goods  Finished  During  the  Period: 
Prime  Cost: 
Materials  and  Supplies  Consumed — Including 

Freight  and  Cartage  thereon $ 

Productive   Labor 

Total  Prime  Cost $ 

Manufacturing  Overhead : 

Superintendence   $ 

Unproductive  Labor 

Heat,  Light,  and  Power 

Factory  Expense 

Repairs    and    Maintenance,    Machinery    and 
Tools 

Total  Manufacturing  Overhead $ 

General  Factory  Overhead: 

Salaries  and  Wages — Shipping  Department..  $ 

Shipping  Material  Consumed, 

Shipping  Department  Supplies 

Miscellaneous  Shipping  Expense 

Traveling  Expense — Shipping  Department 

Stationery  and  Printing  Consumed  by  Factory     

Total  General  Factory  Overhead $ 


Total  Manufacturing  Cost  for  the  Period $. 

Deduct — Increase  of  Inventory  of  Goods  in 
Process  as  between  January  i  and  Decem- 
ber 31,  19 


Add — Decrease  of  Inventory  of  Goods  in 
Process  as  between  January  i  and  Decem- 
ber 31,  19 


Manufacturing  Cost  of  Goods  Finished  During 

the  Period $. 

Inventory  Adjustment: 
Deduct — Increase    of    Inventory    of    Finished 


FORMS    OF    STATEMENTS  ^47 

Statement  of  Income  and  Profit  &  Loss — Continued 
Goods  as  between  January  i  and  December 
31,    19..,   after   deduction   therefrom  of  the 
value   of   goods    distributed    free,   and    used 
by  salesmen 


Add — Decrease  of  Inventory  of  Finished  Goods 
as  between  January  i  and  December  31, 
19. .,  after  deduction  therefrom  of  the  value 
of  goods  distributed  free,  and  used  by  sales- 
men   

Manufacturing  Cost  of  Goods  Sold 

Additional   Cost — Freight,   Handling  and   Ware- 
housing of  Raw  Materials  Consumed 

Total  Cost  of  Goods  Sold 


Gross  Profit  and  Sales $. 

Selling  Expense: 

Salaries  of  Selling  Management $ 

Salaries,  Commissions,  and  Expenses  of  Sales- 
men   

Advertising  Expense 

Free  Goods 

Traveling  Expense  of  Sales  Manager 

Premiums   

Stationery   and    Printing   Consumed   by    Office 
of  Sales  Manager 

Special  Inducements  to  Jobbers 

Salesmen's  Samples  used  in  demonstration 

Sundry  Expense  of  Sales  Office 

Total  Selling  Expense 


Selling  Profit $. 

Administrative  and  General  Expenses: 
Administrative : 

Office  Salaries $ 

General  Office  Expenses  and  Supplies 

Telephone  and  Telegrams 

Legal  Expense 


348  REPORTS   AND   STATEMENTS 

Statement  of  Income  and  Profit  &  Loss — Continued 

Traveling  Expense  of  Administrative  Officers 

Postage  Expense 

Stationery  and  Printing — Office 

Heat  and  Light — Office 

Miscellaneous 

$ 

General :  

Repairs  and  Maintenance  of  Buildings $ 

Experimental    Expense — Processes    and     New 

Goods  

Experimental  Expense — Machinery 

$ 

Total  Administrative  and  General  Expense 


Profit  from  Operations $. 

Additions  to  Income: 

Interest  on  Notes  Receivable $ 

Sundry   Sales   of  Materials   and   Empty   Con- 
tainers    

Discounts     Gained     on     Creditors'     Accounts 

(Cash  Discounts) 

Interest  on  Bank  Balances 

Total  Additions  to  Income 


Total 

Deductions  from  Income: 

Taxes,  Licenses,  and  Fees 

Fire  Protection 

Discounts  Lost  on  Customers'  Accounts  (Cash 

Discounts)   

Interest  and  Discounts — Notes  Payable 

Collection  Fees  and  Other  Bank  Charges 

Total  Deductions  from  Income 


Gross  Profit  and  Income  from  Operating  and  Other  Sources    $. 

Extraordinary  Losses  of  the  Period: 
Frozen   Goods $ 


FORMS   OF   STATEMENTS  34^ 

Statement  of  Income  and  Profit  &  Loss — Continued 

Accounts  Receivable — Uncollectible .' 

Breakage  of  Carboys  and  Other  Empty  Con- 
tainers Returnable  to  Shippers 

Total  Extraordinary  Losses  of  the  Period 

Net  Profit  for  the  Year  Ended  December  31,  19 $ 

Reserved: 

For  Depreciation  of  Physical  Assets $ 

For  Possible  Losses  of  Accounts  Receivable 

Total  Reserved 

Profit  and  Loss  Surplus  at  December  31,  19 $ 

Surplus  at  January  i,  19 $ 

Less  Adjustments  during  the  Period: 

Returned  Sales  of  prior  periods,  and  Frozen 
Goods  sold  in  prior  periods,  the  profit  on 
which  figures  in  the  surplus  as  established 
at  January  i,  19, ,,  including  freight  and 
all  expenses  paid  by  the  Company  on  such 
returns   

Net  Adjusted  Surplus,  January  i,  19 

Surplus  at  January  i,  19. .    (as  per  Balance  Sheet  of  this 

Company  given  in  the  foregoing) $ 


§  299.    Statement  of  Cash  Receipts  and  Disbursements 

Statement  of  Cash  Receipts  and  Disbursements 
For  the  Year  Ended  December  31,  19.. 
Debits — Cash  Received: 
(i)  From  the  Collection  of  Current  Assets: 

Customers'  Accounts $ 

Claims  against  Transportation  Companies 

Notes  and  Loans  Receivable,  and  Interest 
thereon $ 

(2)  From  the  Sale  of  Working  Assets: 

Materials  and  Supplies  Sold  to  Employees  $ 


350 


REPORTS    AND    STATEMENTS 

Cash  Receipts  and  Disbursements — Continued 
Carboys  and  Empty  Containers 

(3)  From  the  Incurrence  of  Liabilities: 

Notes  and  Loans  Payable $ 

Deposits  by  Employees 

Credit  Accounts  of  Officers 

(4)  From  Miscellaneous  Sources: 

Fire  Insurance  Premiums  Refunded $ 

Dividends  on  Mutual  Fire  Policies 

Refunds   by    Creditors,    for    overpayments 

and  allowances  not  deductible  from  bills     

(5)  Total  Receipts  for  Period 

(6)  Balance  on  Hand,  January  i,  19 -.. . . 

(7)  Total  Debits 

Credits — Cash  Disbursed: 
(i)  For  Liabilities  Liquidated: 

To  Creditors $ 

"    Employees — for  Wages 

"    Banks  for  Loans  and  Notes 

"    Mortgagee — for   Reduction  of  Mort- 
gage   


(2)  To  Interest  on  Indebtedness 

(3)  For  Reduction  of  Credit  Accounts  of  Officers 

(4)  For  Pre-Process  Cost  of  Goo4s  Manufactured: 

Freight  and  Cartage  Inward  and  Handling  Charge. 

(5)  For  Factory  Overhead  Expenses: 

Automobile  Expense $ 

Warehouse  Charges  and  Cartage 

General  Expense  of  Factory 

Miscellaneous  Shipping  Expense 


(6)  For  Selling  Expenses : 

Salaries  and  Commissions  of  Salesmen. 

Advertising  Expense 

Special  Commissions  to  Jobbers 


(7)  For  General  and  Administration  Expense : 

Salaries $. 


FORMS   OF    STATEMENTS 

Cash  Receipts  and  Disbursements — Continued 

Postage  Expense 

Telephone  and  Telegrams 

Traveling  Expense  of  Officers 

Legal  Expense 

Miscelaneous  Expense 


(8)  Total  Cash  Disbursements  for  Period $. 

(9)  Balance  on  Hand,  December  31,  19 


( 10)  Total  Credits $• 


351 


CHAPTER   XXV 

PREPARATION  OF  STATEMENTS— MANUFAC- 
TURING CORPORATION 

The  object  of  this  and  the  following  chapter  is  to  illus- 
trate with  actual  figures  how  the  different  periodic  state- 
ments are  made  up,  first  for  a  manufacturing  business  and 
then  for  a  trading  business,  and  to  show  the  different 
methods  of  arranging  the  items.  A  comparison  of  the 
operating  statements  and  balance  sheets  will  indicate  dif- 
ferent methods  of  classification  and  arrangement,  thus 
indicating  that  there  is  no  ideal  form  that  could  be  used  in 
all  cases.  Accountants  differ  in  their  ideas  of  making  state- 
ments, though  in  every  case  the  net  results  would  be  the 
same.  It  will  be  noted  that  the  statements  of  the  Lake 
Manufacturing  Company  are  arranged  in  account  form,  the 
debits  and  credits  being  on  opposite  sides ;  while  in  the  case 
of  the  Bryant-Chase  Company  a  different  order  obtains,  the 
debits  being  given  first,  followed  immediately  by  the  credits. 

§  300.    Trial  Balance 

The  following  trial  balance  shows  the  balances  of  the 
various  accounts  of  the  Lake  Manufacturing  Company  for 
the  fiscal  year  ending  December  31,  1916: 

Lake  Manufacturing  Company 
Trial  Balance,  December  31,  1916 

Cash   $40,324.CX) 

Cash  Deposit  for  Dividend  No.  11 4,100.00 

Cash  Deposit  for  Bond  Interest 5,000.00 


MANUFACTURING   CORPORATION 

Land    200,000.00 

Buildings 300,000.00 

Machinery 200,000.00 

Tools  and  Implements 40,430.00 

Horses,  Wagons,  and  Harness 30,000.00 

Office   Furniture... 5,201.00 

Notes   Receivable 25,812.00 

Accounts  Receivable 163,374.00 

Sinking  Fund 30,000.00 

Investment  of  Surplus 20,000.00 

Salesmen's  Accounts — Advances  on  Salaries  1,960.00 

Organization  Expenses  Unapportioned 14,700,00 

Bond  Discount  Unamortized 12,000.00 

Dividend  No,  11,  5%,  authorized  July  i>  1916         45,000.00 

Good-Will   150,000.00 

Unsubscribed  Stock 100,000.00 

Notes  Payable 

Accounts   Payable 

First  Mortgage  5%  Twenty-Year  Bonds 

Special  Accounts — Officers  and  Clerks 

Bond  Interest  Coupons  Due 

Dividend  No.  11,  Vouchers  Outstanding.... 
Reserve  for  Bad  Debts — less  $1,940  written 

off   

Reserve  for  Depreciation — Buildings,  2^2%. 
Reserve  for  Depreciation — Machinery,  6%,. 
Reserve  for  Depreciation — Horses,  Wagons, 

etc.,  10% 

Capital  Stock,  10,000  shares  at  $100 

Sinking  Fund  Reserve 

Sales,  less  Returns  and  Allowances , . .  = 

Rent  of  Part  of  Business  Premises 

Inventory,    December    31,     1915     (Material 

$74,621 ;  Finished  Stock  $30,000) 104,621.00 

Purchases    390,000.00 

Freight  and  Cartage  Inbound 5,662.00 

Labor — Factory    Pay-Rolls 600,400.00 

Salaries  of  Officers  and  Qerical  Force 75,120.00 

Salaries  of  Salesmen 60,440.00 

Advertising  50,300.00 

Taxes  Paid 4,020.00 

Insurance  2,600.00 

Bond  Interest 10,000.00 


353 


$42,000.00 

103,561.00 

200,000.00 

15,363.00 

5,000.00 
4,100.00 

112.00 

5,000.00 

18,000.00 

3,000.00 

1,000,000.00 

30,000.00 

1,250,550.00 

500.00 


354 


REPORTS    AND    STATEMENTS 


Interest  and  Discount 6,500.00 

Expenses — Stable  4,000.00 

Expenses — Office,  Legal,  and  Unclassified...  25,750.00 

Maintenance — Repairs,  Buildings,  etc 26,942.00 

Profit  and  Loss,  1915  Surplus 77,070.00 


$2,754,256.00    $2,754,256.00 


Inventories,  December  31,  1916: 

Finished   Stock $160,560.00 

Materials  and  Work  in  Process 1 10,000.00 

Factory  Pay-Rolls,  Accrued  but  Not  Paid 5.7SO.oo 

Unexpired  Insurance 912.00 

Interest  Accrued  on  Investments 1,000.00 

Interest  Earned  on  Sinking  Fund 1,200.00 

From  the  foregoing  trial  balance  and  notations,  it  is 
possible  to  prepare  a  manufacturing  account,  a  trading  and 
profit  and  loss  account,  and  a  balance  sheet,  as  of  December 
31,  19 1 6.  The  same  reserves  for  depreciation  are  to  be 
made  as  at  the  end  of  the  preceding  year,  10%  is  to  be 
written  off  from  the  balance  of  organization  expenses,  and 
5%  off  of  bond  discount.  2%  of  notes  and  accounts  re- 
ceivable is  to  be  allowed  as  a  provision  against  possible 
losses.  A  further  appropriation  of  $30,000  is  to  be  made  to 
the  sinking  fund,  the  cash  to  be  given  to  the  trustee  on 
January  2,  19 17.  As  a  final  balance,  the  profits  available 
for  distribution  are  to  be  shown  as  a  credit  balance  to 
Undivided  Profits  account. 

Below  the  balance  sheet  proper,  under  the  head  "Contin- 
gent Liabilities,"  should  be  noted  any  obligations  on  which 
the  company  is  contingently  liable,  such  as  discounted  notes, 
and  similar  possible  obligations.  Contingent  liabilities  in- 
clude those  on  which  the  company  is  liable  in  a  secondary 
way,  the  liability  on  which  becomes  absolute  only  in  case  of 
the  failure  of  some  one  else  involved  to  carry  out  his 
obligation. 


MANUFACTURING  CORPORATION 


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358  REPORTS    AND    STATEMENTS 

§  303.    Balance  Sheet 


Lake  Manufac 
Balance  Sheet  at  Close  of 


Assets 
Current  Assets : 

Cash  on  Hand $40,324.00 

Notes  Receivable $25,812.00 

Accounts  Receivable 163,374.00         189,186.00 

Finished    Stock 160,560.00 

Materials  and  Work  in  Process 1 10,000.00 

Total  Current  Assets $500,070.00 

Special  Funds: 

Sinking     Fund     with     Trustee,     including 

Earnings* $31,200.60 

Surplus  Fund  Investments 20,000.00 

Cash,  Balance  of  Dividend  No.  11 4,100.00 

Cash,  Deposit  for  Bond  Interest 5,000.00           60,300.00 

Fixed  Assets : 

Land  $200,000.00 

Buildings    300,000.00 

Machinery 200,000.00 

Tools  and  Implements 40,430.00 

Horses,  Wagons,  etc 30,000.00 

Office  Furniture 5,201.00 

Total  Fixed  Assets 775,631.00 

Miscellaneous  Assets : 

Good- Will    $150,000.00 

Advances  to  Salesmen 1,960.00 

Insurance  Unexpired 912.00 

Interest  Accrued 1,000.00 

Bond  Discount  Unamortized 1 1,400.00 

Organization  Expenses  Unapportioned 13,230.00         178,502.00 

$1,514,503.00 


•Another  deposit  of  $30f0oo  due  January  2,  191 7. 


MANUFACTURING   CORPORATION  359 


TURING  Company 

Business,  December  31,  1916* 


Liabilities  and  Capital 
Current  Liabilities : 

Notes    Payable $42,000.00 

Accounts  Payable 103,561.00       $145,561.00 

Special  Accounts : 

Officers  and  Clerks 15,363.00 

Bond  Interest  Coupons  Due 5,000.00 

Dividend  No.  1 1,  Vouchers  Outstanding 4,100.00 

Wages  Accrued,  Factory  Pay- Roll 5,750.00 

Total  Current  Liabilities $175,774.00 

Fixed  Liabilities: 

First  Mortgage  5%  Twenty-Year  Bonds 200,000.00 

Reserve  Accounts : 

For  Sinking  Fund $60,000.00 

Interest  Earned  on  above 1,200.00 

For  Bad  Debts 3,896.00 

For  Depreciation  of: 

Buildings    12,500.00 

Machinery    30,000.00 

Horses,  Wagons,  etc 6,000.00         113,596.00 

Total   Liabilities $489,370.00 

Capital  and  Profits: 

Capital   Stock $1,000,000.00 

Less  Stock  Unsubscribed 100,000.00 

Stock   Outstanding $900,000.00 

Surplus  from  last  year 77,070.00 

Undivided  Profits  for  1916 48,063.00 

•  Net  Worth  of  Company 1,025,133.00 

$1,514,503.00 


360  REPORTS   AND   STATEMENTS 

§  304.    Closing  Entries  in  Journal 

The  following  journal  entries  are  required  to  adjust  and 
close  the  various  ledger  accounts  of  the  Lake  Manufacturing 
Company  which  have  been  afifected  by  the  business  opera- 
tions of  the  year.  Two  divisions  of  the  nominal  accounts 
are  made — the  Manufacturing  account,  and  the  Trading 
and  Profit  and  Loss  account  in  which  the  various  accounts 
are  summarized. 

December  31,  1916 

Manufacturing  Account $1,076,433 

To  Inventory   of   Material,   January 

I,    1916 $74,621 

"    Purchases    390,000 

"    Freight  and  Cartage 5,662 

"    Labor — Factory   Pay-Rolls 600,400 

"    Labor — Accrued    5,750 

To  establish  the  Manufacturing  account 
by  transferring  the  above  accounts 
thereto. 


Materials  and  Work  in  Process,  December 

31,    1916 $110,000 

To  Manufacturing  Account $110,000 

To  enter  inventory  of  material  and  work 
in  process  on  the  accounts  stated,  in 
order  to  determine  prime  cost  of  goods 
used. 


Manufacturing  Account $52,150 

To  Maintenance    Charges $26,942 

"   Taxes  4.020 

"    Insurance    1,688 

"    Reserve     for     Depreciation     of 

Buildings    7,500 

"    Reserve     for     Depreciation     of 

Machinery   12,000 


MANUFACTURING   CORPORATION  361 

To  close  the  above  manufacturing  costs 
into  Manufacturing  account.  (The 
unexpired  insurance  is  entered  di- 
rectly to  the  account  and  not  posted 
through  the  journal.) 


Trading  and  Profit  and  Loss  Account $1,048,583 

To  Inventory     of     Finished     Stock, 

January  i,   1916 $30,000 

"    Manufacturing   Account 1,018,583 

To  establish  the  Trading  and  Profit  and 
Loss  account  by  transferring  thereto 
the  inventory  of  finished  goods  on 
hand  at  the  beginning  of  the  year, 
and  the  manufactured  output  for 
1916. 

Sales,   Net $1,250,550 

Inventory  of  Finished  Stock,  December  31, 

1916  160,560 

To  Trading    and    Profit    and    Loss 

Account $1411,110 

To  close  Sales  account  into  Trading 
account  and  to  establish  inventory  of 
finished  goods  as  at  the  end  of  the 
year. 


Trading  and  Profit  and  Loss  account $117,740 

To  Salaries  of  Salesmen $6oj440 

"    Reserve     for     Depreciation     of 

Horses,  Wagons,  etc 3,000 

"    Stable   Expenses 4,000 

"    Advertising 50,300 

To  close   the   various   selling   expenses 
into  Profit  and  Loss  account. 

Trading  and  Profit  and  Loss  account $123,224 

To  Salaries— Office   $75,120 

"    Bond    Interest 10,000 


362 


REPORTS   AND   STATEMENTS 


To  Interest  and  Discount 6,500 

"    Expenses — Office,  Legal  and  Un* 

classified  25,750 

"   Reserve  for  Bad  Debts 3,784 

"    Organization   Expenses i>470 

*'    Bond  Discount 600 

To  close  the  above  general  administra- 
tion charges  into  Profit  and  Loss,  and 
to  write  off  2%  for  bad  debts,  10% 
for  organization  expenses,  and  5%  for 
bond  discount. 

Sublease  of  Premises $500 

Interest  Accrued  on  Investments 1,000 

To  Profit  and  Loss $1,500 

To  close  miscellaneous  income  accounts 
into  Profit  and  Loss. 

Trading  and  Profit  and  Loss $123,063 

To  Undivided   Profits $123^63 

To  close  Profit  and  Loss  account  and 
transfer  the  net  profit  of  $123,063  to 
the  Undivided  Profits  account. 


Undivided  Profits $75,ooo 

To  Dividend  No.  11,  July  i,  1916. . .  $45,000 

"    Sinking  Fund  Reserve 30,000 

To  close  interim  dividend  account  and 
to  appropriate  $30,000  to  the  sinking 
fund  reserve. 

This  completes  the  closing  entries.  It  is  apparent  that, 
instead  of  grouping  the  items  as  shown,  further  subdivisions 
could  have  been  made.  More  detailed  explanations  of  the 
journal  entries  might  be  advantageous,  but  it  will  be  seen 
that  certain  explanations  are  made  in  the  statements  them- 
selves as  an  aid  to  a  clearer  understanding  of  them.  Bad 
debts  written  off  during  the  year,  amounting  to  $1,940, 


MANUFACTURING  CORPORATION  363 

were  charged  directly  to  the  Reserve  for  Bad  Debts  account 
established  at  the  close  of  191 5. 

§  305.  Comments  on  Closing  of  Lake  Manufacturing  Com- 
pany's Books 

The  balance  sheet  exhibits  the  various  assets  and  liabili- 
ties of  the  company,  conveniently  grouped  and  classified. 
The  various  reserves  are  placed  among  the  liabilities  as 
negatives  to  the  corresponding  assets.  They  are  frequently 
placed  on  the  debit  side  as  deductions  from  the  assets.  The 
sinking  fund  reserve  is  an  exception,  since  it  remains  on  the 
credit  side  as  profits  which  eventually  revert  to  surplus. 
The  balance  sheet  should  be  prepared  so  as  to  exhibit  the 
affairs  of  the  company  in  a  clear,  unmistakable  way,  the 
form  being  varied  to  meet  the  needs  of  the  particular 
business. 

The  year's  operating  results  are  set  forth  in  the  Manu- 
facturing account  and  the  Trading  and  Profit  and  Loss  ac- 
count. The  first  statement  exhibits  the  manufacturing 
output  for  the  year  after  allowing  for  work  in  process.  The 
balance  is  carried  to  the  profit  and  loss  statement  as  the  cost 
of  finished  stock.  The  Profit  and  Loss  account  includes  the 
income  from  other  sources,  also  the  various  selling  and 
administrative  expenses  and  the  resultant  net  profit. 

The  Undivided  Profits  account  contains  the  profits  of  the 
year  remaining  unapportioned  and  available  for  dividends. 

It  is  apparent  that  the  Lake  Manufacturing  Company 
does  not  have  a  complete  cost  system.  If  it  had,  the  book 
inventory  of  material,  work  in  process,  and  finished  stock 
would  be  available.  As  the  matter  stands,  physical  inven- 
tories have  to  be  taken  in  order  to  determine  these  values. 

Bond  interest  coupons  are  payable  January  i,  191 7,  and 
$5,<xxD  has  already  been  deposited  with  the  fiscal  agent  for 
their  payment.     A  like  amount  has  been  charged  against 


364 


REPORTS    AND    STATEMENTS 


Profit  and  Loss  and  credited  to  Bond  Coupons  Due.  Coun- 
teracting- entries  are  required  as  the  coupons  are  paid  and 
turned  over  to  the  company. 

When  the  semiannual  dividend  of  $45,000  was  declared, 
a  charge  was  made  to  Dividend  account  and  a  credit  to 
Dividends  Payable.  When  the  voucher  checks  were  issued. 
Dividends  Payable  account  was  debited  and  Dividend 
Vouchers  credited ;  cash  entries  not  having  been  made  until 
the  vouchers  were  returned  from  the  bank.  As  a  result,  the 
dividend  vouchers  still  unpaid  are  clearly  shown,  which  in 
this  case  amount  to  $4,100. 

Allowance  has  been  made  for  depreciation  of  properties 
and  for  possible  losses  on  bad  debts.  The  sinking  fund 
trustee  already  has  $31,200  in  his  possession,  this  including 
$1,200  of  accumulated  interest.  Another  appropriation  of 
$30,000  must  be  turned  over  to  the  trustee  on  January  2, 
191 7,  the  Sinking  Fund  Reserve  account  already  having 
been  credited  with  this  amount. 

Surplus  profits  for  the  year,  amounting  to  $48,063,  still 
remain  on  hand,  after  deducting  the  sinking  fund  reserve 
and  the  interim  dividend  of  July  i.  Another  semiannual 
dividend  will  no  doubt  be  declared,  resulting  in  a  further 
decrease  of  $45,000.  Surplus  funds,  amounting  to  $20,000, 
have  been  set  aside  and  invested  in  securities  to  be  available 
when  necessity  arises. 

Ample  deductions  have  been  made  from  organization 
expenses  and  from  bond  discount,  both  being  amortized  over 
a  term  of  years. 

Among  the  assets  the  special  funds  amount  to  $60,300. 
These  are  appropriated  for  special  purposes  and  set  apart  to 
distinguish  them  from  other  available  funds  of  the  business. 


CHAPTER   XXVI 

PREPARATION  OF  STATEMENTS— TRADING 
CORPORATION 

§  306.    Trial  Balance 

The  following  trial  balance  of  the  Bryant-Chase  Com- 
pany, dealers  in  general  merchandise,  is  as  of  December  31, 
1916: 

Bryant-Chase  Company 
Trial  Balance,  December  31,   19 16 

Cash  $17,800.00 

Notes  Receivable 28,520.00 

Accounts  Receivable 93,410.00 

Stock  Subscriptions 50,000.00 

Investments 30,000.00 

Treasury  Stock 30,000.00 

Real  Estate,  Buildings,  and  Machinery 210,000.00 

Furniture  and  Fixtures 34,600.00 

Delivery  Equipment 14,500.00 

Consigned  Goods  to  Agent,  Not  Sold 2,800.00 

Charges  on  Consigned  Goods  Not  Sold 80.00 

Notes  Payable $38,800.00 

Accounts  Payable (66,550.00 

Reserve  for  Depreciation 3,140.00 

Reserve  for  Bad  Debts 2,100.00 

Capital  Stock  Outstanding 250,000.00 

Capital  Stock  Subscribed 50,000.00 

Working  Capital  Donated 30,000.00 

Sales  390,occ  00 

Goods  Consigned  to  Agents,  at  Cost 14,600.00 

Subrent  of  Warehouse 450.00 

Profit  on  Sale  of  City  Property 1,250.00 

Profit  on  Consignment  Sales 2,340.00 

Interest  on  Investments 200.00 

Discount  on  Purchases 1,990.00 

Rebates  and  Allowances  on  Purchases 1,130.00 


366  REPORTS   AND   STATEMENTS 

Trial  Balance — Continued 

Freight  Inbound 3,150.00 

Rebates  and  Allowances  on  Sales 1,580.00 

Inventory,  December  31,  1915 86,000.00 

Purchases   210,000.00 

Wages  to  Clerks  and  Packers 16,600.00 

Salaries  to  Officers  and  Office  Help 8,400.00 

Salaries  and  Expenses  of  Salesmen 8,890.00 

Office  Expenses 4,600.00 

General  Expenses 3,400.00 

Stable  and  Delivery  Expenses 2,300.00 

Rent  of  Warehouse 2,500.00 

Commissions  Paid 2,800.00 

Discount  on  Sales 3,460.00 

Freight   Outbound 1,840.00 

Cartage 350.00 

Warehouse  Expenses 630.OO 

Light  and  Heat 540.00 

Repairs  1,120.00 

Interest  on  Bank  Charges 290.00 

Interest  on  Cancelled  Mortgage 100.00 

Insurance  and  Taxes 320.00 

Donations   230.00 

Bad  Debts  Written  Off 2,050.00 

Loss  on  Sale  of  Securities 320.00 

Undivided  Profits  on  December  31,  1915 20,630.00 

$873,180.00    $873,180.00 


At  this  time,  allow  $3,000  additional  as  a  reserve  for 
bad  debts,  and  $10,660  additional  as  a  reserve  for  deprecia- 
tion. Salaries  are  overpaid  by  $200.  Accrued  interest  on 
investments,  $850.  The  directors  have,  December  31,  1916, 
declared  a  dividend  of  20%  (dividend  No.  2)  on  the  out- 
standing capital  stock,  payable  January  25,  1917. 

In  closing  the  books  the  following  statements  are  re- 
quired : 

1.  Trading  and  profit  and  loss  statement  for  the  year. 

2.  Balance  sheet  drawn  up  in  suitable  grouping. 

3.  Percentage  statement  based  on  the  net  sales. 


367 


TRADING  CORPORATION 

§  307.    Trading  and  Profit  and  Loss  Statement 
Bryant-Chase  Company 
Trading  and  Profit  &  Loss  Statement 
For  Year  Ended  December  31,  1916 

Earnings 

Gross  Sales $390,000.00 

Less  Allowances  and  Rebates 1,580.00    $388,420.00 

Inventory,  January  i,  1916 $86,000.00 

Purchases   $210,000.00 

Freight  Inward 3,150.00 

$213,150.00 
Less  Allowances  and  Rebates 1,130.00 

$212,020.00 
Less  Goods  Consigned  to  Agents,  at 

cost  14,600.00    197,420.00 

$283,420.00 
Less  Inventory,  December  31,  1916 54,000.00 

Cost  of  Goods  Sold 229,420.00 

Gross  Profit  on  Trading $159,000.00 

Discount  on  Purchases $1,990.00 

Subrent  of  Warehouse 450.00 

Profit  on  Consigned  Goods 2,340.00         4,780.00 

Gross  Business  Profit $163,780.00 

Expenditures 
Selling   Expenses : 
Salaries  and  Expenses  of  Salesmen  $8,890.00 

Wages  to  Clerks  and  Packers 16,600.00 

Commissions 2,800.00 

Discount  on  Sales 3,460.00 

Warehouse  Rent 2,500.00 

Warehouse  Expenses 630.00 

Stable  and  Delivery  Expenses 2,300.00 

Freight  Outward 1,840.00    $39,020.00 


368  REPORTS   AND   STATEMENTS 

Trading  and  Profit  &  Loss  Statement — Continued 

General  and  Administrative  Expenses  : 

Cartage   $350.00 

Salaries — Office 8,200.00 

Repairs 1,120.00 

Interest  on  Bank  Charges 290.00 

Interest  on  Cancelled  Mortgage....  100.00 

Insurance  and  Taxes 320.00 

Donations   230.00 

Office   Expense 4,600.00 

General   Expense 3,400.00 

Light  and  Heat 540.00 

Reserve  for  Bad  Debts 3,000.00 

Reserve  for  Depreciation 10,660.00      32,810.00 

Total  Expenses 71,830.00 

Net  Profit  of  Business  for  Year $91,950.00 

Other  Profit  and  Loss  Items : 

Profit  on  Sale  of  City  Property $1,250.00 

Interest  on  Investments 200.00 

Interest  on  Investments,  Accrued 850.00 

$2,300.00 
Deduct : 
Loss  on  Sale  of  Securities 320.00 

Profit  Outside  of  Business 1,980.00 

Net  Profit  for  Year  1916 $93.930.oo 

§  308.    Balance  Sheet 

Bryant-Chase  Company 
Balance  Sheet,  as  of  December  31,  19 16 

Current  Assets:  Assets 

Cash  $17,800.00 

Notes  Receivable 28,520.00 

Salaries  Overpaid .• 200.00      $46,520.00 

Accounts  Receivable $93,410.00 

Less  Reserve  for  Bad  Debts 3,050.00        90,360.00 

$136,880.00 


TRADING  CORPORATION  ,69 

Balance  Skeet— Continued 
Investments : 

Stocks  and  Bonds  of  Other  Companies 30,000.00 

Inventories : 

Merchandise $54,000.00 

Goods  in  Hands  of  Agents,  including  Freight 
Charges  2,880.00       56,880.00 

Accrued  Items: 

Accrued  Interest  on  Investments i 850.00 

Subscriptions  to  Stock 50,000.00 

Treasury  Stock 30,000.00 

Fixed  Assets: 

Real  Estate,  Buildings,  and  Machinery $210,000.00 

Furniture  and  Fixtures 34,600.00 

Delivery   Equipment 14,500.00 

$259,100.00 
Less  Reserve  for  Depredation 13,800.00      245,300.00 

Total  Assets $549,910.00 

Liabilities  and  Capital 

Current  Liabilities: 

Notes   Payable $38,800.00 

Accounts    Payable 66,550.00 

Dividend  No.  2,  payable  January  25,  1917 50,000.00    $155,350.00 

Capital  and  Undivided  Profits: 

Capital  Stock  Outstanding $250,000.00 

Capital  Stock  Subscribed 50,000.00 

Working  Capital  Donated 30,000.00 

Undivided  Profits,   December  31, 

1915  20,630.00 

Net  Profit  for  1916 93,930.oo  $444,560.00 

Less  Dividend  No.  2,  payable  Jan- 
uary 25,  1917 50,000.00     394,560.00 

Company's  Net  Worth  $549,910.00 


370  REPORTS   AND   STATEMENTS 

Statement  of  Percentages 
For  Year  Ended  December  31,  1916 
Based  on  Net  Sales 

Net  Sales $388,420.00  equals  100% 


Gross  Profit  and  Trading 159,000.00 

Other  Income  and  Profits 6,760.00 

Net  Profit 93,930.00 

Cost  of  Sales 229,420.00 

Selling    Expenses 39,020.00 

General  and  Administrative  Expenses....  32,810.00 


40.935% 
1.740% 
24.182% 
59.065% 
10.046% 
8.447% 


§  309.    Closing  Journal  Entries 

The  following  entries  are  made  on  the  assumption  that 
a  trading  or  merchandise  account  is  in  use  and  that  the  be- 
ginning and  closing  inventories  were  entered  therein  without 
journal  entries.  Instead  of  posting  the  totals  of  the  groups 
to  the  Trading  or  Profit  and  Loss  account,  it  is  better  to 
carry  the  separate  amounts.  In  this  way  the  various  items 
are  shown  in  the  Trading  account  and  in  the  Profit  and  Loss 
account,  making  it  easier  to  compile  therefrom  the  trading 
and  profit  and  loss  statements. 

Sales  Account $390,000 

Discount  on  Purchases 1,990 

Subrent  of  Warehouse 450 

Profit  on  Consigned  Goods 2,340 

Goods  Consigned  to  Agents 14,600 

Rebates  and  Allowances  on  Purchases....  1,130 

To  Trading  Account $410,510 

To  close  above  accounts  into  Trading 
account. 

Trading  Account $214,730 

To  Purchases    $210,000 

"    Freight  Inward 3»i50 

"    Allowances  and  Rebates  on  Sales  1,580 

To  close  above  accounts   into  Trading 
account. 


TRADING   CORPORATION 


371 


Trading    Account $163,780 

To  Profit  and  Loss $163,780 

To  close  gross  trading  profit  into  Profit 
and  Loss  account. 

Profit  and  Loss $39,020 

To  Salaries  and  Expenses  of  Sales- 
men      $8,890 

"    Wages  to  Clerks  and  Packers...  16,600 

*■    Commissions 2,800 

**    Discount  on  Sales 3,460 

"    Warehouse  Rent 2,500 

"    Warehouse  Expenses 630 

"    Stable  and  Delivery  Expenses. . .  2,300 

"    Freight    Outward 1,840 

To  close  the  above  selling  expenses  into 
Profit  and  Loss  account. 

Profit  and  Loss $32,810 

To  Cartage    $350 

"    Salaries — Ofiice   8,200 

"    Repairs    1,120 

*'    Interest  on  Bank   Charges 290 

"    Interest  on  Cancelled    Mortgage  lOO 

^'    Insurance  and  Taxes 320 

"   Donations    230 

'*   Office    Expense 4,600 

"    General    Expense 3,400 

*    Light  and  Heat 540 

'     Reserve  for  Bad  Debts 3,000 

"    Reserve  for  Depreciation 10,660 

To  close  the  above  general  and  admin- 
istrative expenses  into  Profit  and  Loss 
account. 

Interest  Accrued  on  Investments $850 

To  Interest  on  Investments $850 

To  record  accrued  interest  on  invest- 
ments. 


272  REPORTS    AND    STATEMENTS 

City  Property $1,250 

Interest  on  Investments 1,050 

To  Profit  and  Loss $2,300 

To  close  the  above  profits  into  Profit 
and  Loss  account. 

Profit  and  Loss $320 

To    Securities $320 

For  loss  on  sale  of  securities  closed  into 
Profit  and  Loss  account. 

Profit  and  Loss $93»930 

To  Undivided  Profits. $93,930 

To  close  net  profit  for  year  into  Undi- 
vided Profits  account,  adding  it  to  the 
former  balance  of  $20,630. 

Undivided   Profits $50,000 

To  Dividend  No.  2 $50,000 

To  record  Dividend  No.  2  declared  by 
the  board  of  directors  December  31, 
1916,  being  20%  of  the  outstanding 
capital  stock. 

There  are,  of  course,  variations  of  these  journal  entries 
that  under  other  conditions  may  be  preferable.  The  ar- 
rangement and  allocation  of  items  in  the  trading  and  profit 
and  loss  statement  might,  and  frequently  would,  be  changed. 
The  final  net  profit  is  practically  the  same  in  every  case. 

§  310.    Comments  on  Closing  of  Bryant-Chase  Company's 
Books 

The  manner  of  closing  the  books  for  a  trading  corpora- 
tion does  not  differ  from  that  of  the  manufacturing  cor- 
poration. 

Attention  is  called  to  the  accounts  pecuHar  to  corpora- 
tions, such  as  subscriptions  to  Stock,  Treasury  Stock,  Capi- 
tal Stock,  Capital  Stock  Subscribed,  and  Working  Capital 


TRADING   CORPORATION 


373 


Donated.  These  are  discussed  in  detail  in  Chapter  VI, 
"Distinctive  Corporate  Accounts." 

It  will  be  seen  that  the  form  of  statement  differs  slightly 
from  that  of  the  Lake  Manufacturing  Company,  preceding. 
This  form  is  used  very  extensively  by  large  corporations, 
and  has  met  with  general  approval  from  accountants. 

The  balance  sheet  shows  a  different  division  of  items 
from  that  of  the  Lake  Manufacturing  Company,  simply  to 
indicate  the  variation  in  arrangement  frequently  found  in 
practice.  There  is  no  one  form  that  is  considered  better 
than  all  others. 

The  dividend  is  deducted  from  profits  and  credited  to 
Dividend  account,  but  this  is  shown  only  in  the  balance 
sheet ;  it  differs  slightly  from  the  preceding  form.  The  divi- 
dend is  not  yet  payable,  but  when  due  the  required  entries 
will  be  made.  The  percentage  statement  is  brief  but  shows 
the  manner  of  setting  forth  such  information.  It  may  be 
elaborated  and  extended  in  any  way  thought  desirable.  It 
is  of  inestimable  value  in  presenting  information  pertaining 
to  the  rise  and  fall  of  results  in  comparison  with  previous 
years. 


CHAPTER    XXVII 

CORPORATE    REPORTS 

§311.    Special  Reports 

In  the  preceding  chapters  the  discussion  has  been  devoted 
to  the  reports  and  statements  as  rendered  by  the  accounting 
department  to  the  corporate  officials.  In  this  chapter  an 
attempt  will  be  made  to  treat  briefly  the  reports  as  rendered 
by  the  officials  and  the  directors  to  the  stockholders,  to  the 
public,  and  to  governmental  bodies.  The  scope  and  content 
of  the  reports  as  outlined  are  necessarily  suggestive  but 
cover  in  general  practically  all  the  important  points  which 
they  usually  take  up. 

§  312.    Reports  to  Stockholders 

At  the  annual  meeting,  it  is  customary  for  the  directors 
to  give  an  account  of  their  stewardship  for  the  preceding 
year,  through  reports  presented  by  their  elected  officers. 
The  character  of  such  reports  depends  upon  the  size  of  the 
company,  the  nature  of  the  business,  and  the  amount  of 
information  which  it  is  wise  to  disclose.  It  is  obvious  that  in 
a  small  corporation,  where  the  stockholders  are  in  close 
touch  with  the  management  and  the  business,  a  report,  if 
made  at  all,  would  be  merely  a  brief  recital  of  facts.  But  in 
the  case  of  large  industrial  and  public  service  corporations 
where  the  stock  is  in  many  hands,  it  is  the  practice  to 
prepare  an  exhaustive  annual  report  which  is  printed  and 
distributed  to  the  stockholders. 

Special  reports  from  officers  and  committees  may  be 
called  for  at  any  meeting  of  stockholders. 

374 


CORPORATE   REPORTS  375 

§  313.    Reports  of  Officers  and  Committees 

The  following  reports  may  be  required  at  the  annual 
meeting,  though  it  is  seldom  that  all  of  them  will  be  called 
for  at  any  one  meeting. 

1.  Committee  Reports.  Under  this  head  come  the  re- 
ports of  the  various  standing  committees  authorized  to  take 
charge  of  certain  parts  of  the  business,  as  the  "Executive 
Committee"  and  the  "Finance  Committee,"  and  of  any 
special  committees  appointed  to  act  on  certain  questions  or 
in  certain  matters. 

2.  Auditor's  Report.  This  report  is  usually  merged 
into,  and  becomes  part  of,  the  president's  or  treasurer's 
report,  as  its  details  might  well  appear  in  either  of  these 
other  reports.  All  accounts  and  balance  sheet  items  are,  in 
the  larger  corporations,  audited  and  passed  upon  by  a  pro- 
fessional accountant  before  they  are  published  or  presented 
to  the  annual  meeting. 

3.  General  Manager's  Report.  Gives  a  detailed  review 
of  the  general  manager's  conduct  of  the  business  during  the 
year.  This  report  is  generally  transmitted  to  the  president 
and  through  him  to  the  stockholders,  either  as  part  of  the 
president's  report  or  in  separate  form.  It  is  frequently 
known- as  the  superintendent's  report. 

4.  Treasurer's  Report.  Contains  usually  a  cash  state- 
ment for  the  year,  statement  of  earnings  and  expenses,  a 
general  balance  sheet,  etc.  The  treasurer's  report  is  fre- 
quently incorporated  in  the  president's  report. 

5.  President's  Report.  Reviews  the  business  of  the  pre- 
ceding year  and  sets  forth  the  plans  proposed  for  the  coming 
year.  This  report  usually  includes  a  statement  of  the  gross 
business  done,  the  net  earnings,  improvements  made,  condi- 
tion of  the  finances,  and  the  company's  property  generally, 
and  any  other  items  of  interest  not  covered  by  other  re- 
ports. 


2^7^ 


REPORTS    AND   STATEMENTS 


§  314.    Committee  Reports 

In  the  larger  corporations  there  are  usually  one  or  more 
standing  committees  appointed  from  the  board  of  directors, 
such  as  the  executive  committee  which  exercises  the  general 
authority  of  the  board  in  the  interim  between  its  meetings, 
and  the  finance  committee  which  has  general  supervision  of 
the  financial  affairs  of  the  company.  The  standing  commit- 
tees do  not  usually  report  to  the  stockholders,  their  reports 
being  made  to  the  board  of  directors  and  the  matters  under 
their  supervision  being  usually  covered  by  the  president's 
and  the  treasurer's  reports  respectively. 

Special  committees  of  stockholders  are  frequently  ap- 
pointed in  both  large  and  small  corporations.  The  duties  of 
these  special  committees  are  to  investigate  and  report  or  act 
upon  a  special  matter  assigned  them.  Where  such  matters 
are  important  or  urgent,  special  meetings  of  the  stock- 
holders might  be  called  to  hear  their  reports ;  but  otherwise 
these  committees  would  report  to  the  stockholders  at  the 
annual  meeting. 

There  is  no  special  form  for  committee  reports.  A  clear 
statement  of  what  they  have  accomplished,  addressed  to  the 
stockholders  or  the  directors  as  the  case  may  be,  and  signed 
by  the  members  of  the  committee  or  by  the  chairman  for  the 
committee,  is  all  that  is  required.. 

§  315.    Auditor's  Report 

The  by-laws  of  a  corporation  frequently  make  provision 
for  periodical  audits  by  professional  accountants.  In  some 
cases  auditing  committees  are  appointed  by  the  stockholders 
or  the  board  of  directors  to  pass  upon  the  books  and  ac- 
counts of  the  corporation,  either  independently  or  in  con- 
junction with  professional  auditors.  In  no  case,  however, 
should  an  audit  made  by  a  committee  of  stockholders  or 
directors,  be  considered  an  audit  in  the  true  sense  of  the 


CORPORATE    REPORTS  377 

word.  An  effective  audit  requires  an  examination  of  the 
books  of  account,  of  the  cash,  securities,  inventory,  calcula- 
tions, etc. ;  and  this  necessitates  expert  work  of  an  accu- 
rate, painstaking-  nature,  which  can  be  given  only  by  a 
professional  auditor. 

A  monthly  or  quarterly  audit  or  inspection  of  the 
accounts  by  a  committee  of  directors  is  often  made  and  is  to 
be  strongly  commended;  but  the  directors  are  not  likely  to 
take  the  time,  or  give  the  effort,  or  possess  the  expert  knowl- 
edge necessary  for  a  really  effective  audit.  Besides  this, 
they  cannot  always  be  depended  upon  to  expose  or  to  disap- 
prove of  questionable  occurrences  which  have  taken  place 
during  their  period  of  office  and  perhaps  with  their  knowl- 
edge and  concurrence,  and  it  is  quite  apparent  that  such 
audits  are  not  to  be  given  the  same  weight  as  would  be  given 
the  audit  of  a  public  accountant. 

A  complete  audit  should  review  all  of  the  business  opera- 
tions of  the  year ;  but,  since  in  many  cases  this  requires  more 
time  and  expense  than  is  thought  expedient,  an  audit  is 
sometimes  made  in  which  the  examination  is  restricted  to 
the  more  important  items  and  accounts.  In  such  cases  sum- 
maries are  compiled,  results  proved,  certain  entries  vouched, 
cash  inspected,  bank  balances  proved,  and  perhaps  an  in- 
spection made  of  certain  items  or  block  of  entries  through- 
out the  period  under  review.  While  a  partial  audit  of  this 
kind  is  not  thoroughly  satisfactory,  it  is  frequently  deemed 
sufficient  by  the  corporate  officials.  In  making"  either  a  par- 
tial or  a  complete  audit,  the  auditor  is  expected'  to  see  that 
the  books  present  the  true  condition  of  the  corporate  busi- 
ness ;  and  that  the  profit  and  loss  statement  and  balance  sheet 
taken  therefrom  exhibit,  properly  arranged,  the  true  results 
of  business  operations  for  the  period  under  review.  The 
auditor  is,  as  a  rule,  engaged  by  the  directors  and  reports 
to  them,  though  not  infrequently  he  is  employed  by  the 


378  REPORTS   AND   STATEMENTS 

stockholders,  in  which  case  his  report  would,  of  course,  go 
to  the  stockholders.  In  either  case  his  report  must  be  un- 
biased and  prepared  for  the  benefit  of  all  concerned.  As 
stated,  the  auditor's  report  is  frequently  utilized  for,  and 
more  or  less  completely  incorporated  in,  the  reports  of  the 
president  and  the  treasurer. 

The  audit  report  for  a  large  corporation  may  include  the 
following  : 

1.  Statement  of  earnings  and  operating  expenses.  This 
is  frequently  made  in  comparative  form  to  show  the  varia- 
tion of  current  income  and  expenses  from  those  of  previous 
years. 

2.  Balance  sheet.  This  shows  the  assets  and  liabilities 
of  the  company  properly  classified,  on  the  date  of  closing. 
It  also  is  frequently  given  in  comparative  form. 

3.  Schedules  and  statements.  These  give  the  support- 
ing details  and  analysis  of  the  results  given  in  the  balance 
sheet  and  the  statement  of  earnings  and  operating  expenses. 

4.  Percentage  exhibit.  By  this  exhibit  in  comparative 
form,  the  income,  and  the  operating  and  administrative 
expenses  based  on  the  sales  are  shown  in  comparative  form. 
Such  comparisons  of  amounts  can  be  most  readily  made  by 
means  of  percentages. 

5.  Auditor's  certificate.  This  is  a  brief  certificate  cer- 
tifying to  the  accuracy  of  the  exhibits  and  statements. 

6.  Auditor's  general  report  or  letter  of  explanation. 
This  may  be  very  brief  or  considerably  extended,  as  the 
occasion  demands.  It  may  contain  suggestions  or  recom- 
mendations pertaining  to  the  books  and  accounts  if  such  are 
deemed  advisable  or  necessary.* 

In  some  cases  the  auditor's  report  is  merely  a  certificate 
of  the  correctness  of  the  books  and  accounts,  or  of  the 


•For  an  exhaustive  discussion  of  audits,  see  "Auditing — Theory  and  Practice" 
by  Robert  H.  Montgomery. 


CORPORATE  REPORTS 


379 


financial  statement  made  to  the  stockholders,  given  after  an 
examination  of  the  books.  Of  this  general  character  is  the 
auditor's  certificate  which  appears  in  connection  with  the 
annual  report  to  stockholders  of  the  United  States  Steel 
Corporation.    This  certificate  is  as  follows  : 

Certificate  of  Auditors 

New  York,  March  8,  1916. 
To  THE  Stockholders  of  the  United  States  Steel  Corporation  : 

We  have  examined  the  books  of  the  U.  S.  Steel  Corporation  and 
Subsidiary  Companies  for  the  year  ending  December  31,  1915,  and 
certify  that  the  Balance  Sheet  at  that  date  and  the  Relative  Income 
Account  are  correctly  prepared  therefrom. 

During  the  year  only  actual  additions  and  extensions  have  been 
charged  to  Property  Account,  and  the  provision  made  for  depreciation 
and  extinguishment  is,  in  our  opinion,  fair  and  reasonable.  The  item 
of  Deferred  Charges  represents  expenditures  reasonably  and  properly 
carried  forward  to  operations  in  subsequent  years. 

The  valuation  of  stocks  on  hand,  as  shown  by  inventories  certified 
by  the  responsible  officials,  have  been  carefully  and  accurately  made 
at  approximate  cost.  Full  provision  has  been  made  for  bad  and 
doubtful  accounts  receivable  and  for  all  ascertainable  liabilities. 

We  have  verified  the  cash  and  securities  by  actual  inspection  or 
by  certificates  from  the  Depositaries,  and  are  of  opinion  that  the 
Marketable  Bonds  and  Stocks  included  in  Current  Assets  are  worth 
the  value  at  which  they  are  stated  in  the  Balance  Sheet. 

We  certify  that  in  our  opinion  the  Balance  Sheet  is  properly 
drawn  up  so  as  to  show  the  financial  position  of  the  Corporation  and 
Subsidiary  Companies  on  December  31,  1915,  and  the  Relative  Income 
Account  is  a  fair  and  correct  statement  of  the  net  earnings  for  the 
fiscal  year  ending  at  that  date. 

Price,  Waterhouse  &  Co. 

§  316.    General  Manager's  Report 

The  general  manager's  or  superintendent's  report  will 
give  the  important  details  of  his  work  for  the  preceding 
year.  It  is  but  seldom  that  such  a  report  is  made  direct  to 
the  stockholders.  The  usual  course  is  for  the  manager  or 
superintendent  to  hand  his  report  to  the  president,  who  may 


380  REPORTS    AND    STATEMENTS 

incorporate  it  bodily  in  his  report  or  make  such  extracts 
from  it  as  he  thinks  will  be  of  interest  to  the  stockholders  of 
the  company. 

§  317.    Treasurer's  Report 

In  many  corporations  the  treasurer  makes  no  inde- 
pendent report,  the  president's  report  covering  the  general 
affairs  and  conditions  of  the  corporation  together  with  its 
finances  and  plans  for  the  future.  This  is  true,  for  instance, 
of  the  United  States  Steel  Corporation,  where  but  one 
formal  report — that  of  the  chairman  of  the  board — is  made 
to  the  stockholders.  In  perhaps  the  majority  of  cases,  how- 
ever, the  treasurer  makes  his  own  report  to  the  stockholders, 
covering  in  it  such  details  of  the  financial  affairs  of  the 
corporation  as  the  directors  deem  it  expedient  for  the 
stockholders  to  know;  or,  to  express  it  otherwise,  all  such 
financial  details  as  will  be  of  interest  to  the  stockholders, 
the  publication  of  which  will  not  result  in  injury  to  the 
company's  business. 

Where  but  one  formal  report  is  made  to  the  stock- 
holders and  this  report  is  made  by  the  president,  the  treas- 
urer or  the  treasurer's  department  will,  of  course,  supply 
the  president  with  material  for  the  financial  portion  of  his 
statement.  In  any  case,  the  two  officials  should  work  in 
sufficiently  close  touch  to  prevent  any  serious  overlapping 
of  their  reports. 

The  treasurer's  report  may  be  informal,  merely  giving 
the  general  results  of  the  year's  work ;  or  it  may  be  a  more 
or  less  detailed  statement  of  the  company's  financial  condi- 
tion, or  may  take  the  form  of  a  complete  balance  sheet  and 
profit  and  loss  statement.  The  following  from  the  annual 
report  of  the  United  Fruit  Company  shows  the  treasurer's 
introduction  to  the  detailed  exhibits,  thus  giving  an  idea  as 
to  the  scope  of  the  complete  report. 


CORPORATE    REPORTS 


381 


Treasurer's  Report 

To  THE  President  and  Board  of  Directors 
OF  THE  United  Fruit  Company  : 
I   hand  you  herewith   statements  covering  the  operations   of  the 
company  for  the  fiscal  year  ended  September  30,  1915,  together  with 
reports  showing  its  financial  condition  on  that  date,  viz. : 
Income  Account 
Balance   Sheet 

Cost  of  Plantations  and  Equipment 
Live  Stock 

Area  of  Owned  and  Leased  Lands 
Area  of  Cultivations 
Railways 

Steamship  Service 
Insurance  Fund 

Charles  A.  Hubbard, 

Treasurer 
Boston,  December  3,  1915. 

§  318.    President's  Report 

The  president's  report  is  usually  the  most  Important  of 
those  made  to  the  stockholders  at  the  annual  meeting.  In 
many  cases  it  is  the  only  formal  report.  Its  contents  will 
vary  with  the  conditions.  Where  it  is  the  only  report,  it 
will  cover  both  the  general  and  financial  conditions  of  the 
company,  as  well  as  any  special  conditions  that  are  of 
interest  to  the  stockholders. 

The  following  report  is  brief  but  satisfactory.  It 
prefaces  a  formal  balance  sheet  and  income  report,  and  with 
these  constitutes  the  entire  annual  report  to  the  stock- 
holders. 

To  THE  Stockholders  of  the 

American  Coal  Products  Company: 

The  Directors  herewith  submit  for  the  information  of  the  Stock- 
holders the  following  financial  statements  covering  the  fiscal  year 
ended  December  31,  1915: 

Against  operations  for  the  year  1915  we  have  written  off  a  suf- 
ficient proportion  of  the  cost  of  our  new  plants  to  bring  their  capital- 


382 


REPORTS   AND   STATEMENTS 


ization  down  to  a  peace  basis.  We  also  instructed  all  of  our  subsid- 
iary companies,  in  making  their  returns  for  the  year,  to  charge  off 
doubtful  items. 

Upon  our  regular  profit-sharing  plans  and  special  compensation 
to  all  of  our  wage  earners  we  have  provided  out  of  the  earnings  of  the 
year  for  the  distribution  of  approximately  $550,000,  partly  in  cash  and 
partly  in  stock.  Every  employee  of  the  Company  has  received  some 
definite  benefit  from  its  prosperity. 

After  deducting  the  above  items  the  net  profit  for  the  year 
amounts  to  $2,902,236.30 

Deducting  7%  cash  dividends  on  Preferred  Stock...         175,000.00 

Leaves $2,727,236.30 

This    has    been    apportioned    by    the    Directors    as 
follows : 

Dividends  on  Common  Stock : 

In  Cash,  7% $761,932.50 

In  Common  Stock,  5% 538,000.00 

Reserves  420,000.00 

Surplus    1,007,303.80    $2,727,236.30 

The   excess   of  current  assets   over   current   liabili- 
ties has  increased  during  the  year  by $3,389,727.31 

and  now  stands  at $8,245,776.93 

The  $2,000,000  of  notes  outstanding  a  year  ago  have  been  paid  by 
an  issue  of  approximately  the  same  amount  of  Preferred  Stock.  The 
Company  has  now  no  obligations  at  any  bank,  and  $900,000  in  market- 
able securities  in  excess  of  ordinary  needs. 

The  name  of  the  American  Coal  Products  Company  has  been 
changed  to  "The  Barrett  Company"  with  a  similar  amount  of  stock  as 
the  American  Coal  Products  Company,  and  stock  certificates  are  to  be 
exchanged,  share  for  share,  in  the  immediate  future,  notice  of  which 
will  be  sent  to  the  stockholders  shortly. 

Appended  hereto  are  Consolidated  Income  Account  for  the  year 
1915  and  Comparative  Consolidated  Balance  Sheet  as  at  December  31, 
191S  and  1914-* 

WiLUAM  Hamlin  Childs, 

President 

March  i,  1916 

The  only  formal  rq^ort  presented  at  the  annual  meeting- 
of  the  stockholders  of  the  United  States  Steel  Corporation  is 


"These  statements  have  been  omitted. 


CORPORATE   REPORTS  383 

a  report  from  the  board  of  directors  signed  by  the  chair- 
man of  the  board.  This  corresponds  to  the  president's 
report  in  other  corporations.  The  report  is  very  compre- 
hensive, covering  everything  of  interest  to  the  stockholders 
that  may  properly  be  disclosed.  The  heading  of  this  report 
and  a  brief  statement  of  the  matters  discussed  appears 
below. 

Fourteenth  Annual  Report 

TO  Stockholders  of 

XJnited  States  Steel  Corporation 

Office  of  United  States  Steel  Corporation, 
51  Newark  Street,  Hoboken,  New  Jersey, 
March  14,  1916. 

To  THE  Stockholders: 

The  Board  of  Directors  submits  herewith  a  combined  report  of 
the  operations  and  affairs  of  the  United  States  Steel  Corporation  and 
Subsidiary  Companies  for  the  fiscal  year  which  ended  December  31, 
1915,  together  with  a  statement  of  the  condition  of  the  finances  and 
property  at  the  close  of  that  year. 

The  report  covers : 

1.  Summary  of  income  for  the  year. 

2.  Summary  of  surplus  account. 

3.  Comparative   income    for   two   years — 19 14   and 

1915- 

4.  Maintenance,  renewal,  and  extraordinary  replace- 

ments. 

5.  Bond    sinking,    depreciation,    and    extraordinary 

replacement  funds. 

6.  Summary   of   depreciation   provided    from   gross 

earnings. 

7.  Trustee's  account  of  bond  sinking  funds. 

8.  Capital  stock,   bonded  debenture,   and  mortgage 

debt. 


384  REPORTS    AND   STATEMENTS 

9.    Purchase   money  obligations,   special  loans,   and 
notes  payable. 

10.  Summary  of  inventories. 

1 1.  Comparative  summary  of  production  for  two  years 

— 1914  and  1915. 

12.  Summary  of  capital  expenditure. 

13.  Employees  and  pay-rolls. 

14.  Volume  of  business. 

15.  Balance  sheet,  statements  of  accounts,  and  sta- 

tistics. 

16.  Comparative  general  summary  of  business  for  two 

years — 1914  and  1915. 

17.  General  information. 

The  report  is  followed  by  a  consolidated  general  balance 
sheet  as  of  December  31,  191 5,  together  with  the  consoli- 
dated income  account  and  general  financial  statement  of  all 
properties. 

The  correctness  of  the  financial  details  of  this  report  is 
certified  to  by  a  prominent  firm  of  accountants,  the  form  of 
this  certificate  appearing  in  §  315. 

§  319.    Statutory  Corporation  Reports 

On  account  of  the  very  great  diversity  found  in  the 
corporation  reports  required  by  the  various  states,  no 
specific  discussion  of  these  reports  is  possible  here.  All 
that  can  be  given  is  a  general  reference  to  the  reports 
usually  required,  the  details  of  which  in  each  state  must  be 
found  by  reference  to  the  authorities  by  which  they  are 
prescribed. 

In  at  least  one-half  of  all  the  states  of  the  Union,  domes- 
tic corporations  are  required  to  pay  an  annual  tax  on  the 
amount  of  capital  stock  outstanding  and  to  make  a  report 
upon  which  this  tax  is  based.    Corporations  holding  charters 


CORPORATE   REPORTS 


385 


from  other  states  are  required  to  make  returns  to  both 
states.  Local  reports  must  also  be  made  for  purposes  of 
property  taxation,  by  both  domestic  and  foreign  corpora- 
tions. Under  the  Federal  Income  Tax  Law,  all  corpora- 
tions are  subject  to  a  tax  on  their  net  income,  and  must 
make  a  federal  report  upon  which  this  taxation  is  based. 
Corporations  doing  business  in  the  United  States  and 
Canada  are  also  required  to  make  annual  reports  to  desig- 
nated state  and  government  officials.  Reports  from  banks 
and  trust  companies  are  required  several  times  each  year. 

Blank  forms  for  all  these  reports  are  usually  furnished 
by  the  authorities.  Foreign  corporations  generally  report 
on  the  same  blank  as  domestic  corporations,  though  in  some 
of  the  states  a  special  blank  is  provided  for  their  use. 

§  320.    The  Annual  Report 

The  annual  corporation  report  as  required  in  most  of 
the  states  sets  forth  the  names  of  directors,  amount  of  capi- 
tal, financial  conditions,  and  operations  for  the  past  year; 
and  must  be  filed  with  the  designated  state  authority,  usually 
the  Secretary  of  State.  There  is  a  time  specified  when 
reports  are  to  be  filed,  and  a  penalty  is  frequently  imposed 
for  failure  to  file  the  report  within  the  specified  time. 
Foreign  corporations  doing  business  in  a  state  are  required 
to  file  reports  in  both  the  home  and  the  outside  state  and  to 
comply  with  the  laws  of  each. 

In  some  states  it  is  required  that  the  annual  report  be 
recorded  in  the  county  wherein  the  corporation  is  located, 
either  in  duplicate  or  on  a  blank  for  that  particular  purpose. 
Not  infrequently,  the  one  report  is  recorded  in  both  the 
state  and  county  records,  and  then  returned  to  the  company 
with  certifications  of  record  noted  thereon. 

In  practically  all  the  states,  public  service  companies 
must  make  reports  of  an  exhaustive  nature,  which  are  re- 


386  REPORTS   AND   STATEMENTS 

quired  to  be  filed  once  a  year  or  oftener  with  designated 
authorities.  If  there  is  a  public  utilities  commission  in  the 
state,  such  reports  are  made  to  it.  Railroad  companies 
doing  an  interstate  business  are  required  to  report  to  the 
Interstate  Commerce  Commission. 

The  annual  reports  required  by  some  of  the  states, 
especially  Pennsylvania,  are  somewhat  elaborate.  Separate 
blanks  are  usually  supplied  for  the  different  classes  of  cor- 
porations, as  public  service  and  insurance  companies ;  while 
even  further  divisions  are  made  in  some  states,  where  dif- 
ferent blanks  are  used  for  different  kinds  of  business.  This 
is  the  case  in  Pennsylvania,  where  trading  companies, 
manufacturing  companies,  hotels,  and  other  kinds  of  com- 
panies report  on  separate  blanks.  In  most  states  where 
reports  are  to  be  filed,  a  penalty  is  attached  to  the  failure  to 
do  so  within  the  time  limit  designated. 

§  321.    Federal  Corporation  Report 

At  the  present  time  the  Federal  Income  Ta-x  Law  re- 
quires every  corporation  to  file  with  the  Collector  of  Internal 
Revenue  of  the  district  in  which  the  company  has  its  prin- 
cipal place  of  business,  a  report  of  its  operations  for  each 
calendar  or  fiscal  year.  This  report  is  made  for  the  purpose 
of  determining  each  company's  net  income  for  the  year,  on 
which  the  government  levies  a  tax  of  2%.*  Separate  forms 
are  provided  in  duplicate  for  the  different  lines  of  business, 
as  mercantile,  miscellaneous,  manufacturing,  public  service, 
insurance  companies,  banks  and  other  financial  institutions. 

§  322.    Taxable  Corporations 

Every  corporation,  joint-stock  company,  or  association, 
and  every  insurance  company  organized  in  the  United 
States,  excepting  only  the  classes  of  corporations  or  associa- 

•Congrcss,  September,  1916,  increased  the  tax  from  1%  to  2%  on  total  net 
income. 


CORPORATE   REPORTS 


387 


tions  specially  exempted,  must  pay  a  tax  of  2%  on  its  net 
income. 

Corporations  organized  or  existing  under  the  laws  of 
any  foreign  country  must  also  pay  a  tax  of  2%  on  the 
amount  of  net  income  accruing  from  business  transacted 
and  capital  invested  in  the  United  States.  For  failure  to 
comply  with  the  provisions  of  the  law,  the  assessment  is 
increased  50%  and  liability  to  specific  penalty,  not  exceeding 
$10,000,  is  incurred.  Under  both  federal  and  state  laws 
certain  corporations  and  associations  are  exempted  from 
taxation. 

§  323.    Exempted  Corporations 

The  law  specifically  exempts  the  following  corporations 
and  associations  from  the  payment  of  the  Federal  Income 
Tax: 

1.  Labor,  agricultural,  or  horticultural  organizations. 

2.  Mutual  savings  banks  not  having  capital  stock. 

3.  Fraternal  beneficiary  societies,  orders,  or  associations 
operating  under  the  lodge  system  and  providing  for  payment 
of  life,  sick,  accident,  and  other  benefits  to  members  or  their 
dependents. 

4.  Domestic  building  and  loan  associations. 

5.  Cemetery  companies  organized  and  operated  exclu- 
sively for  the  mutual  benefit  of  members. 

6.  Corporations  or  associations  organized  and  operated 
exclusively  for  religious,  charitable,  scientific  or  educational 
purposes,  no  part  of  the  net  income  of  which  inures  to  the 
benefit  of  any  private  stockholder  or  individual. 

7.  Business  leagues,  chambers  of  commerce,  or  boards 
of  trade  not  organized  for  profit,  or  no  part  of  the  income 
of  which  inures  to  the  benefit  of  private  stockholders  or  in- 
dividuals. 

8.  Civic  leagues  and  organizations  not  organized  for 


388  REPORTS    AND   STATEMENTS 

profit,   but   operated   exclusively   for   promotion   of   social 
welfare. 

9.  Clubs  organized  and  operated  exclusively  for  pleasure, 
recreation  and  other  non-profitable  purposes,  no  part  of  the 
net  income  of  which  inures  to  the  benefit  of  any  private 
stockholder  or  member. 

10.  Farmers'  or  other  mutual  hail,  cyclone,  or  fire  insur- 
ance companies,  mutual  ditch  or  irrigation  companies, 
mutual  or  co-operative  telephone  companies,  or  like  organi- 
zations of  a  purely  local  character,  the  income  of  which  con- 
sists solely  of  assessments,  dues,  and  fees  collected  from 
members  for  the  sole  purpose  of  meeting  its  expenses. 

11.  Farmers',  fruit  growers',  or  like  associations,  or- 
ganized and  operated  as  sales  agents  for  the  purpose  of 
marketing  the  products  of  its  members  and  turning  back  to 
them  the  proceeds  of  sales,  less  the  necessary  selling  ex- 
penses, on  the  basis  of  the  quantity  of  produce  furnished 
by  them. 

12.  Corporations  or  associations  organized  for  the  ex- 
clusive purpose  of  holding  title  to  property,  collecting  income 
therefrom,  and  turning  over  the  entire  amount  thereof,  less 
expenses,  to  an  organization  which  itself  is  exempt  from  the 
tax  imposed  by  this  title. 

13.  Federal  land  banks  and  national  farm-loan  associa- 
tions. 

14.  Joint-stock  land  banks  as  to  income  derived  from 
bonds  or  debentures  of  other  joint-stock  land  banks  or  any 
Federal  land  bank  belonging  to  such  joint-stock  land  bank. 

It  should  be  especially  noted  that  in  the  case  of  the 
sixth  and  seventh  classes  of  corporations  above  mentioned, 
the  exemption  is  forfeited  if  their  stockholders  or  members 
receive  a  financial  profit  from  the  operations  of  the  corpora- 
tion or  association. 


CORPORATE  REPORTS 


389 


§  324.    Return  Made  for  Either  Calendar  or  Fiscal  Year 

Every  corporation  which  does  not  give  notice  that  its 
fiscal  year  ends  at  a  date  other  than  December  31,  must  file 
a  return  of  its  capital  stock  and  indebtedness  as  of  that  date 
and  its  income  for  the  calendar  year,  on  or  before  March  i 
of  the  following  year.  Any  corporation  whose  fiscal  year 
does  not  coincide  with  the  calendar  year  will  be  permitted 
to  file  its  annual  return  for  its  fiscal  year  instead  of  for  the 
calendar  year,  by  notifying  the  collector  of  the  district  in 
which  its  principal  office  is  located,  of  the  date  with  which 
its  fiscal  year  closes.  Its  return  must  then  be  filed  within 
sixty  days  after  the  close  of  its  fiscal  year.  The  date  desig- 
nated as  the  close  of  the  fiscal  year  must  be  the  last  day 
of  a  month ;  and  written  notice  of  the  selected  date  must  be 
filed  with  the  local  collector  not  less  than  thirty  days  prior 
to  "the  first  day  of  March  of  the  year  in  which  its  reports 
would  be  filed." 

Full  details  respecting  the  Income  Tax  Law,  its  reports, 
exemptions,  withholding  of  individual  income,  source,  etc., 
can  be  had  from  the  internal  revenue  officer  of  any  local 
district.  The  regulations  are  fully  set  forth  on  the  blanks 
themselves. 


Part  VI — Corporate  Combinations 


CHAPTER   XXVIII 

METHODS    OF    CONSOLIDATION 

§  325.    Purposes  of  Corporate  Combinations 

The  past  thirty  years  have  witnessed  a  wonderful 
growth  in  the  number  and  size  of  business  combinations. 
The  movement  began  among  the  railroads,  but  it  soon 
appeared  in  manufacturing,  and  more  recently  it  has 
entered  the  commercial  field.  So  common  are  combina- 
tions of  corporate  interests  at  the  present  time  that  nearly 
all  large  industrial,  transportation,  and  public  service 
corporations  own  or  control  one  or  more  underlying  or 
affiliated  companies. 

The  primary  purpose  of  practically  all  combinations 
is  to  eliminate  competition  and  secure  larger  profits 
through  the  control  of  prices  or  rates.  It  is  true,  also, 
that  large-scale  operation  makes  it  possible  to  effect 
economies,  to  increase  efficiency,  and  to  render  more 
satisfactory  service.  In  spite  of  these  advantages,  some 
of  which  are  shared  by  the  consuming  public,  there  has 
always  been  more  or  less  hostility  toward  combinations, 
due  largely  to  their  abuse  of  the  monopolistic  powers  they 
usually  possess.  This  hostility  has  manifested  itself  in 
state  and  federal  laws  designed  to  control  or  prohibit 
those  combinations  which  are  regarded  as  inimical  to  the 
public  welfare.     Legislation  of  this  kind  has  limited  the 

390 


METHODS   OF  CONSOLIDAT1U:n 


391 


field  within  which  combinations  may  be  formed,  and  it 
has  also  made  their  formation — even  when  permissible — ■ 
somewhat  more  difficult  to  effect. 

§  326.    Methods  of  Corporate  Consolidation  or  Control 

Besides  the  legal  difficulties  in  the  way  of  corporate 
combinations,  there  are  usually  other  difficulties  of  a 
financial  or  economic  character  which  have  to  be  over- 
come. To  formulate  a  plan  legally  and  financially  possible, 
and  at  the  same  time  acceptable  to  the  varying  interests 
of  those  concerned,  is  a  matter  which  frequently  taxes  the 
ability  and  ingenuity  of  those  who  undertake  its 
consummation. 

"Mutual  understandings,"  "gentlemen's  agreements," 
etc.,  whereby  the  competing  parties  agree  to  divide  ter- 
ritory, restrict  output,  maintain  uniform  prices,  or  do 
other  things  for  their  mutual  protection;  or  agreements 
of  competitors  to  pool  their  interests  and  divide  the 
resulting  profits,  have  frequently  been  tried  but  rarely 
with  success. 

The  better  and  more  acceptable  methods  of  consoli- 
dating or  otherwise  bringing  corporate  interests  under  a 
unified  control  are  given  below,  and  most  of  these  methods 
are  illustrated  in  the  succeeding  chapters. 

1.  By  Merger.  The  several  consolidating  corpora- 
tions reincorporate  under  a  single  charter  and  become 
constituent  parts  of  the  new  company.  This  plan  is 
practically  an  outright  purchase,  as  outlined  in  the  next 
paragraph,  except  that  the  purchase  under  Plan  2  does 
not  necessitate  the  rechartering  of  the  purchasing  cor- 
poration.    (See  Chapter  XXIX.) 

2.  By  Purchase.  The  property  and  plant  of  a  com- 
petitor is  purchased  outright,  and  either  closed  down  or 
continued  as  a  branch  of  the  purchasing  company.    This 


392 


CORPORATE   COMBINATIONS 


may  involve  the  voluntary  dissolution  of  the  selling  com- 
pany. The  current  assets  and  liabilities  of  the  selling 
company  may  or  may  not  be  included  in  the  sale;  if  not, 
they  must  be  disposed  of  preliminary  to  the  company's 
liquidation.  Any  bonded  liabilities  will,  of  course,  follow 
the  plant,  or  other  property,  which  forms  the  underlying 
security.     (See  Chapter  XXIX.) 

3.  By  Lease.  The  property  of  one  or  more  com- 
peting companies  is  leased  to  another  company  for  a 
stated  number  of  years,  very  much  as  one  person 
would  lease  or  rent  properties  from  another.  (See 
Chapter  XXX.) 

4.  By  Holding  Companies.  Usually  the  holding 
company  is  a  corporation  created  for  the  purpose  of  deal- 
ing in  the  securities  of  other  corporations,  though  in  some 
cases  one  of  the  consolidating  companies,  possessing  a 
liberal  charter,  may  be  made  use  of  for  this  purpose. 
Ownership  of  a  bare  majority — sometimes  even  less  than 
half — of  the  stock  of  the  competing  companies  is  suf- 
ficient for  effective  control. 

The  holding  company  is  perhaps  the  most  common 
form  of  combination.  It  is  the  form  to  which  the  name 
"Trust"  is  usually  applied,  because  it  is  really  the  lineal 
descendant  of  the  trust  or  trusteeship  organization  under 
which  such  famous  combinations  as  the  Standard  Oil 
Company  and  the  Sugar  Trust  were  first  formed.  (See 
Chapter  XXXI.) 

5.  By  Parent  Companies.  Territorial  rights  or  pat- 
ent rights  are  sold  or  leased  to  operating  companies  in 
different  localities,  these  operating  companies  being  first 
organized  by  the  parent  company  and  sufficient  stock 
being  retained  in  each  to  insure  its  control.  This  is 
merely  a  variation  of  the  holding  company.  (See 
Chapter  XXXI.) 


METHODS   OF  CONSOLIDATION  3^3 

6.  By  Interlocking  Directorates.  Under  this  method, 
either  the  same  men  appear  as  directors  of  the  different 
corporations  to  be  controlled,  or  men  representing  the 
interest  which  controls  the  allied  corporations  are  so 
distributed  through  the  various  boards  of  directors  as 
effectually  to  control  the  corporate  operations.  Each 
company  is  to  all  intents  and  purposes  a  separate  and 
independent  company,  the  control  exercised  through 
its  board  of  directors  not  affecting  its  status  or  its 
accounting. 

§  327.    Expert  Investigations 

It  is  customary  in  any  consolidation  of  large  companies 
to  have  a  careful  preliminary  investigation  of  the  whole 
matter  by  lawyers,  financiers,  engineers,  appraisers,  and 
accountants,  and  the  results  of  such  examinations  when 
properly  carried  out  determine  whether  or  not  the  pro- 
posed plans  are  feasible  or  advisable 

The  following  very  excellent  discussion  of  an  account- 
ant's investigation  for  purposes  of  a  merger  or  other  con- 
solidation, covers  very  completely  the  details  and  procedure. 

Accounting  Investigation  Preliminary  to 
Consolidation* 

§  328.    Scope  of  Investigation 

The  nature  and  extent  of  the  accountant's  investiga- 
tion will  depend,  of  course,  largely  upon  his  instructions 
and  the  conditions;  but  we  will  assume  that  manufac- 
turing concerns  in  the  same  line  of  business  contemplate 
consoHdation;  that  the  report  of  the  accountant  upon 
each  of  the  plants  is  to  form  the  basis  of  the  consolidation, 


•The  discussion  of  an  accounting  investigation  which  follows  is,  by  permissKm, 
taken  almost  verbatim  from  "Corporation  Accounting  and  Investirations  by  r.  H. 
Macpherson,  F.  C.  A.,  C.  P.  A.,  in  the  Journal  of  Accountancy,  November,  1908. 


394 


CORPORATE  COMBINATIONS 


and  that  the  accountant's  instructions  are  general  and 
not  specific;  and  that  they  include  the  determining  of  the 
assets  and  liabilities  as  well  as  the  earnings. 

Accountants  differ  as  to  the  scope  of  an  investigation. 
There  are  those  who  take  the  position  that  the  accountant 
is  not  expected  to  make  the  thorough  examination  that 
a  regular  audit  would  entail,  but  that  the  genuineness  of 
the  books  and  of  the  balance  sheet  should  be  assumed. 
Most  accountants,  however,  believe  that  the  investigating 
accountant  should  analyze  the  accounts  thoroughly,  in 
the  doing  of  which  fraud,  if  any,  would  be  discovered. 

Regular  audits  and  special  investigations  have,  or 
ought  to  have,  the  same  end  in  view — the  obtaining  of  a 
correct  statement  of  facts ;  and  an  accountant  should  not 
accept  and  prepare  a  report  from  any  balance  sheet  with- 
out satisfying  himself  by  a  sufficient  analysis  of  the 
regularity  of  the  accounts,  and  of  the  methods  followed 
by  which  are  produced  the  various  items  which  enter  into 
the  assets  of  a  concern,  or  which  go  to  make  up  the 
revenue  and  expenditure  accounts. 

§  329.    Report  on  Assets 

Statements  covering  each  of  the  concerns  examined 
should  be  included  in  the  report  of  the  accountants  in- 
dependent of  each  other,  and,  based  upon  the  specifications 
which  have  been  set  out,  should  contain  information  as 
follows: 

I.     Assets  as  of  a  given  date  (the  same  in  each  in- 
stance) divided  as  to: 

(a)  Realty 

(b)  Plant  and  machinery 

(c)  Merchandise  (raw  material) 

(d)  Merchandise  (in  process) 

(e)  Merchandise  (finished  product) 


METHODS   OF  CONSOLIDATION  095 

(f)  Leasehold 

(g)  Good-will 
(h)     Patents 

(i)  Accounts  receivable 

(j)  Bills  receivable 

(k)  Cash  on  hand  and  in  bank 

(1)  Bills  receivable  under  discount  (indirect) 

(m)  Accrued  interest,  insurance,  etc. 

(n)  Such  other  divisions  of  the  assets  as  the 
nature  of  the  business  may  demand 

2.  Liabilities,  as  of  a  given  date  (the  same  in  each 

instance),  divided  as  to: 

(a)  Bills  payable 

(b)  Accounts  payable 

(c)  Mortgage  indebtedness 

(d)  Bills  receivable  under  discount  (indirect) 

(e)  Other  indirect  liabiHties 

(f)  Capital  account 

(g)  Such  other  division  of  the  liabilities  as  the 

nature  of  the  business  may  demand 

3.  Revenues  and  expenses.     Of  each  business,  show- 

ing earning  power  of  each  in  a  given  time 
(usually  three  years  if  the  business  has  been  in 
operation  so  long)  and  preferably  covering  the 
same  period. 

Taking  the  items  under  "Assets'*  in  their  order,  the 
accountant  will  ordinarily  not  be  called  upon  to  verify 
items  "a"  to  "h";  the  land,  buildings,  stock  in  trade,  lease- 
hold, etc.,  being  specially  valued  by  independent  valuers. 
If  not,  and  these  are  subject  to  verification  by  the  auditor, 
he  should  in  the  case  of: 

(a)     Realty.     Call  for  the  title  deeds  and  see  that  the 


396  CORPORATE   COMBINATIONS 

account  is  not  charged  with  fictitious  increases  in  value, 
or  with  the  annual  taxes. 

(b)  See  that  a  sufficient  allowance  has  been  made  for 
depreciation  on  buildings,  etc. 

(c,  d,  e)  Merchandise.  Raw,  in  process,  and  the  fin- 
ished product.  Get  certified  inventories,  which  should  be 
checked  both  as  to  extensions  and  additions;  an  indepen- 
dent appraisement  is  altogether  preferable.  Compare 
inventory  with  invoices  in  the  case  of  raw  material.  To 
see  that  profits  are  not  anticipated,  a  careful  inspection 
of  cost  accounts  is  required.  In  case  of  manufactured 
stock  care  must  be  exercised  to  see  that  office  and  selling 
expenses  are  not  prorated  and  added  to  the  costs  of  goods 
appearing  in  the  inventory.  Note  should  be  taken  of  the 
"dead  wood"  in  the  stock  and  that  proper  allowance  has 
been  made  to  cover. 

(f)  Leasehold.  Is  not  usually  a  consideration,  but 
if  found  to  exist,  a  special  valuation  to  ascertain  present 
value  is  best;  otherwise,  the  original  cost,  less  propor- 
tionate reduction  for  the  expired  period,  should  be  taken. 

(g)  Good-will.  .  This  item  can  only  be  determined 
by  agreement  between  the  parties,  and  is  one  which  does 
not  seriously  concern  the  accountant,  except  that  if  it  is 
put  in  at  an  arbitrary  sum  by  the  vendors,  he  should  see 
to  it  that  the  price  be  set  forth  separately  and  distinctly 
in  the  "assets"  so  that  the  purchasers  may  know  just  how 
much  they  are  expected  to  pay. 

(h)  Patents.  See  that  these  are  entered  at  their 
proper  present  worth — which  will  be  determined  by  the 
remaining  life  thereof,  and  the  present  "state  of  the  art" 
in  that  particular  connection. 

(i)  Accounts  receivable.  A  careful  examination 
should  be  made  to  ascertain  the  condition  of  these,  that 
they  are  alive  and  collectible,  and  that  proper  provision 


METHODS    OF   CONSOLIDATION  397 

has  been  made  for  bad  and  doubtful;  also  that  secreted 
in  the  accounts  receivable  may  not  be  found  charges  for 
"goods  on  consignment"  billed  out  at  the  usual  profit  and 
going  to  swell  the  volume  of  output,  thus  unduly  in- 
creasing the  earnings  by  the  "anticipation  of  profits," 

(j)  Bills  receivable.  Same  examination  as  in  the  case 
of  accounts,  so  far  as  prospects  of  realization  are 
concerned. 

(k)  Cash  on  hand  and  in  bank.  The  same  verification 
as  in  a  regular  audit. 

(1)  Bills  receivable  under  discount.  This  is  an  in- 
direct asset  as  well  as  an  indirect  liability,  and  it  is 
important  in  the  case  of  an  amalgamation,  where  th'e 
liabilities  are  being  assumed,  that  information  on  this 
point  should  be  given.  It  may  be  necessary  that  some 
allowance  should  be  made  in  anticipation  of  "loss  upon 
realization." 

(m)  Accrued  interest,  insurance,  etc.  See  that  the 
claim  for  these  is  fair  and  proper, 

§  330.    Report  on  Liabilities 

Turning  next  to  the  question  of  liabilities,  we  take  up: 
(a,  b)  Bills  payable  and  accounts  payable.  The 
verification  will  be  the  same  as  in  a  regular  audit.  In  this 
connection  it  may  be  proper  to  say  that  there  is  not  much 
danger  of  the  liabilities  being  overstated.  The  principal 
danger  lies  in  the  understating  or  not  taking  to  account 
of  the  outstanding  HabiUties,  and  this  must  be  carefully 
guarded  against  if  the  transfer  of  the  business  involves 
the  assuming  of  all  the  liabiHties. 

(c)  Mortgage  indebtedness.  Verification  by  the  ob- 
taining of  a  statement  from  the  mortgagees,  both  as  to 
principal  and  arrears  or  accrued  interest, 

(d)  Bills   receivable   under   discount.     The   remarks 


398  CORPORATE   COMBINATIONS 

under  item  "1"  in  assets  would  properly  apply  here,  being 
applicable  in  both  cases. 

(e)  Other  indirect  liabilities.  These  may  be  in  the 
nature  of  indorsements  (although  a  strictly  improper  and 
illegal  proceeding  in  the  case  of  joint-stock  companies), 
claims  for  damages,  disputed  accounts  for  materials, 
services  or  commissions.  A  distinct  statement  in  writing 
as  to  the  existence  or  non-existence  of  these  should  be 
obtained  from  the  proper  officers  of  the  company. 

(f)  The  value  of  the  business  to  the  purchasers  will 
be  represented  by  the  difference  between  the  assets  and 
liabilities  in  each  case  and  if  profitable  should  equal  the 
issue  of  capital  stock  with  an  addition  to  the  assets  of  any 
undivided  profits,  which  would  enhance  the  value  of  the 
equity  to  be  transferred  to  the  amalgamation. 

§  331.    Revenue  and  Expense  Accounts 

The  question  of  revenue  and  expenses  of  operation 
will  in  all  probability  more  particularly  occupy  the  atten- 
tion of  the  accountant,  rather  than  the  ascertaining  of 
the  value  of  the  assets  and  liabilities;  in  fact,  his  instruc- 
tions may  limit  him  to  the  determining  of  these  without 
regard  to  the  other.  Taking  the  revenue  accounts  first: 
the  accountant  will  require  to  make  a  careful  investiga- 
tion of  the  receipts  for  the  period  (usually  three  years) 
under  examination.  He  will  see  that  no  extraneous 
revenue  has  been  introduced  and  that  the  progress  in  the 
revenue  account  has  been  consistent  and  steady,  or  other- 
wise. He  must  be  watchful  that  the  revenue  account  has 
not  been  increased  by  credits  for  goods  "on  consignment" 
with  an  off-setting  entry  to  accounts  receivable. 

Other  points  which  require  to  be  looked  into  are: 
that  goods  "on  approval"  likely  to  be  returned  to  stock 
afterwards  have  not  found  their  way  in  the  sales  account; 


METHODS    OF   CONSOLIDATION  399 

that  fictitious  sales,  for  the  purpose  of  swelling  the  rev- 
enue, have  not  been  put  through  the  books,  and  shipments 
not  made  before  close  of  inventory;  that  incompleted  and 
unshipped  orders  have  not  been  credited  to  sales  account, 
thus  inflating  revenue  by  ungained  profits;  that  rebates 
and  allowances  are  a  charge  against  sales  and  not  an 
addition  to  merchandise  account.  In  a  word,  the  bona 
adcs  of  all  sales,  especially  near  the  end  of  the  period, 
should  be  determined  to  the  satisfaction  of  the  accountant. 

It  is  the  duty  of  the  accountant  to  see  that  all  the 
expenses  entered  are  a  proper  charge  against  the  business 
and  that  they  are  made  within  the  proper  period;  that 
there  is  no  reduction  in  expenses  towards  the  close  of  the 
term  under  inspection;  that  the  expenses  are  regular  and 
consistent  and  bear  a  steady  ratio  to  the  turnover;  that 
proper  and  reasonable  allowances  have  been  made  for  re- 
pairs and  renewals,  and  that  these  are  charged  against 
revenue  and  not  as  an  increase  of  capital. 

Excessive  profits  from  any  particular  cause  should  be 
noted,  as,  for  instance,  those  which  might  arise  from  the 
making  of  heavy  purchases  in  anticipation  of  an  upward 
tendency  in  prices,  and  which  anticipation  had  been  ful- 
filled. He  should  be  satisfied  that  all  profits  earned  and 
taken  to  account  are  incidental  to  the  business.  A  sale 
of  real  estate  not  required  for  the  purposes  of  the  business, 
and  made  at  a  substantial  profit,  forms  an  example.  On 
the  other  hand,  expenditures  of  exceptional  and  unusual 
character  which  have  gone  to  reduce  the  profits  below 
normal  should  be  noted. 

§  332.    Cost  of  Operation 

In  the  consideration  of  the  cost  of  operation,  heed 
should  be  given  to  the  effect  which  a  limited  capital  has 
had  upon  the  expenses  of  operation.     Lack  of  capital  is 


400 


CORPORATE  COMBINATIONS 


naturally  followed  by  increased  borrowings,  and  increased 
borrowings  augment  the  interest  account.  Operation  is 
thus  charged  with  a  sum  which,  had  adequate  capital  been 
invested,  would  have  been  in  the  nature  of  a  dividend. 
By  way  of  illustration,  take  a  business  in  which  every 
dollar  of  capital  invested  was  borrowed.  This  may  appear 
an  extreme  case,  but  such  a  business  is,  nevertheless, 
sometimes  to  be  found.  The  borrowed  capital  is  $100,000. 
Upon  this  sum  interest  is  paid  out  of  the  business  and 
charged  to  operating  expenses.  We  are  asked  to  inves- 
tigate. In  the  preparation  of  the  profit  and  loss  account 
we  eliminate  the  $6,000  interest  paid  on  this  sum,  in  order 
to  arrive  at  the  earning  power  of  the  business.  It  can 
readily  be  seen  how  unfair  any  other  course  would  have 
been,  and  how  lack  of  sufficient  capital  in  any  business 
will  impair  the  earning  power  and  affect  the  showing  as 
to  profits,  unless  allowance  be  made  therefor.  There  is 
no  room  here  for  the  exercise  of  a  display  of  good  judg- 
ment on  the  part  of  the  auditor  in  determining  what  the 
"adequate  capital"  should  be. 

§  333-    Reports  and  Certificates 

Reports  in  detail  upon  each  business  should  be  pre- 
pared and  furnished  the  principals,  and  these  should  form 
the  basis  upon  which  the  amalgamation  is  carried  out. 
Regard,  of  course,  will  also  be  had  to  the  introduction  of 
other  interests  where  more  extensive  operations  are  con- 
templated by  the  amalgamating  company. 

In  addition  to  the  report  in  detail,  a  certificate  is 
usually  prepared  for  use  in  the  prospectus.  This  certificate 
is  generally  barren  of  all  information  except  as  to  the 
revenues,  expenses  of  operation,  and  profit-earning  power 
of  the  various  businesses  entering  the  amalgamation,  and 
these  in  the  aggregate.     Indeed,  certificates  are  not  un- 


METHODS   OF  CONSOLATION 


401 


common  in  which  information  is  given  only  as  to  the 
profits  earned  by  the  several  businesses.  It  is  unusual  to 
see  any  reference  to  the  amount  of  capital  invested.  A 
model  certificate  would  be  one  framed  somewhat  after  the 
following  style: 

CERTIFICATION 
Gentlemen: — I  have  examined  the  records  of  The  Brown  Manu- 
facturing Company,  Limited,  and  of  The  Jones  Manufacturing  Company, 
Limited,  each  for  a  period  of  three  years,  and  hereby  certify  to  the 
correctness  of  the  underwritten  statements,  as  to  Capital,  Earnings, 
Expenses  of  Operation,  and  Net  Earnings,  covering  the  period  given : 

Brown  Manufacturing  Co.,  Limited 

Net  Capital                                 Expenses  of        Net  Eam- 
Employed           Earnings            Operation                 ings 
1898 $ $ $ $ 

1899 

1900 


Total.  $ $ $.. 

Jones  Manufacturing  Co.,  Limited 

Net  Capital  Expenses  of  Net  Eam- 

Employed  Earnings  Operation  ings 

1898 $ $ $ $ 

i8q9 $ $ $ $ 

1900 $ $ $. $ 


Total.  $ $ $. 


Combined  Companies 

Net  Capital  Expenses  of  Net  Eam- 

Employed  Earnings         Operation  ings 

1898 $ $ $ $ 

1899 $ $ $ $ 

1900 $ $ $ $ 


Total.  $ $ $ 

For  further  information  reference  is  made  to  my  reports  in  detail 
herewith. 

John  Thompson, 

Accountant 


402 


CORPORATE   COMBINATIONS 


The  less  detail  there  is  in  the  report  the  better,  for 
the  obvious  reason  that  much  of  it  would  not  be  under- 
stood by  the  average  individual,  and  the  tendency  would 
be  to  befog  rather  than  enlighten,  and  that  is  very  un- 
desirable. But  an  accountant  issuing  a  certificate  framed 
as  above,  with  a  simple  qualifying  reference  to  a  report 
for  further  and  detailed  information,  will  be  placing  him- 
self upon  safe  and  sure  ground. 


CHAPTER    XXIX 
CONSOLIDATION    BY    MERGER 

§  334*    General  Procedure  for  Merger 

When  a  consolidation  is  to  be  efifected  by  merger,  the 
consolidating  companies  usually  form  one  large  corpora- 
tion. The  new  corporation  becomes  the  sole  legal  entity, 
while  the  original  companies  lose  their  separate  existence 
and  are  finally  dissolved.  The  merger  agreement  may 
stipulate  that  one  or  more  of  the  merging  companies 
shall  first  modify  in  some  way  its  existing  assets  or 
liabilities.  Usually,  however,  the  new  corporation  takes 
over  at  once,  as  far  as  it  legally  can,  the  entire  rights, 
property,  privileges,  and  franchises  of  the .  constituent 
corporations  as  "going  concerns,"  continuing  the  busi- 
ness of  each,  fulfilling  all  existing  contracts,  collecting  all 
outstanding  claims,  and  discharging  all  current  liabilities. 
This  is  a  form  of  combination  that  has  in  many  cases  proven 
effective  and  satisfactory. 

The  following  example  illustrates  the  manner  of 
merging  several  independent  concerns  one  of  which  is  a 
partnership.  The  details  and  the  accounting  require- 
ments are  taken  up  in  proper  sequence.  Although  this 
example  is  made  somewhat  exhaustive  in  order  to  bring 
out  the  important  points,  it  is,  of  course,  impossible  to 
present  all  of  the  points  that  may  come  up  in  connection 
with  a  corporation  merger. 

§  335-     General  Conditions  of  the  Merger 

Three  corporations  and  a  partnership  are  to  be  com- 

403 


404 


CORPORATE   COMBINATIONS 


bined.  All  are  prosperous  manufacturing  concerns  in  the 
same  or  allied  industries.  They  are  to  become  incorporated 
under  the  laws  of  New  Jersey  as  the  "Long-Bain  Manu- 
facturing Company"  with  an  authorized  capital  stock  of 
$16,000,000,  of  which  one-half  is  to  be  common  stock,  and 
one-half  7%  cumulative  preferred  stock;  par  value  of 
shares,  $100  each.  There  is  also  to  be  an  issue  of  first 
mortgage  5%  thirty-year  sinking  fund  bonds  of  $5,000,- 
000.  They  are  to  be  coupon  in  form  and  in  denominations 
of  $1,000  and  $10,000,  with  privilege  of  registration  as  to 
principal. 

§  336.    Statement  of  Concerns  to  Be  Merged 

Statement  of  Merging  Companies 
January  i,  1916 

Long  Bain           Vine       Bell  & 

Assets              Company  Company  Company     Davis         Total 

Cash    $572,800  $272,500       $33,800    $36,100       $915,200 

Notes    Receivable..        340,600  135,800         69,100     114,000         659,500 

Accounts  Receivable     1,021,300  492,750       162,800      82,400      1,759,250 

Prepaid  Charges...         46,200  38,150          9,200        4,000          97,550 

Investments 500,000       150,000       25,000         675,000 

Stock  and  Material.        964,300  510,000       188,800     152,000       1,815,100 

Supplies   175,100  51,900          7,800      12,400         247,200 

Pledged    Securities 120,000      35,ooo         155,000 

Due  from  Bain  Com- 
pany       85,000       16,000         101,000 

Furniture      and 

Fixtures    125,000  62,000         22,000      14,000         223,000 

Patents,      Patterns 

and   Tools 450,000  244,850 

Buildings  and  Plant    4,390,000  3,359,000 

Good-Will   1,000,000      

Sinking  Fund 740,000       


132,500 

92,000 

919,350 

450,000 

110,000 

8,309,000 

250,000 

1,250,000 
740,000 

Total  $10,410,300  $5,436,950  $1,326,000  $692,900  $17,866,150 


CONSOLIDATION    BY    MERGER  ^qS 

Long  Bain           Vine  Bell  & 

Liabilities          Company  Company  Company  Davis  Total 

Secured  Loans $ $100,000    $ $30,000  $130,000 

Notes    Payable 685,000  270,000       150,000  75,100  1,180,100 

Accounts  Payable..        350,000  540,000       202,600  205,100  1,297,700 

Accrued    Charges..          37,900  11,640           8,200  6,200  63,940 

Reserve  for  Depre- 
ciation         345.100  120,500         54,000  519,600 

Reserve    for   Bad 

Debts 10,000  5,310           1,200  1,000  17,510 

Reserve    for    Insur- 
ance                 105,500  105,500 

Mortgage  Payable 300,000       250,000  20,000  570,000 

Interest  Accrued  on 

Mortgage  Payable       4,500       500  5,000 

Dividend  Payable..        230,000  105,000         30,000  365,000 

First  Mortgage  5% 

Bonds    2,500,000  2,500,000 

Capital  Stock 5,000,000  3,500,000       600,000  355,000*  9,455,000 

Surplus  1,146,800  480,000         30,000  1,656,800 


Total  $10,410,300  $5,436,950  $1,326,000  $692,900  $17,866,150 


Profits  for  Four  Years  : 

For   Year   1912..      $550,000  $290,000  $45,000  $22,500  $907,500 

1913. .       640,000  340,000  71,000  29,500  1,080,500 

1914..       680,000  430,000  57,000  26,400  1,193,400 

1 91 5.,        760,000  370,000  62,000  38,600  1,230,600 


Total  $2,630,000  $1430,000     $235,000  $117,000    $4,412,000 


Average   $657,500     $357,50o       $58,750    $29,250    $1,103,000 


All  the  merging  concerns  have  been  profitable  and  the 
corporations  have  been  paying  high  dividends.  All  but 
the  Vine  Company  have  allowed  a  large  proportion  of 


'Capital  to  credit  of  partners  at  tUs  date. 


4o6  CORPORATE   COMBINATIONS 

their  profits  to  remain  in  the  business,  and  this  is  also 
true  of  Bell  &  Davis. 

§  337-    Terms  of  Merger 

The  four  concerns  sell  out  to  the  new  company  and 
receive  in  exchange  and  in  full  payment  for  their  respec- 
tive properties,  stock  as  stated  below: 

Preferred  Common  Total 

To  Long  Company $4,000,000  $4,000,000  $8,000,000 

To   Bain    Company 2,500,000  2,500,000  5,000.000 

To   Vine   Company 450,000  450,000  900,000 

To  Bell  &  Davis 250,000  250,000  500,000 

To  the  underwriters  for  services. . .        100,000  100,000  200,000 

$7,300,000      $7,300,000    $14,600,000 
To  be  sold  to  the  public 700,000  700,000        1,400,000 

Total  authorized  issue $8,000,000      $8,000,000    $16,000,000 


Each  company  is  to  pay  any  dividends  due  its  stock- 
holders at  the  date  of  the  merger;  it  is  to  Hquidate  its 
secured  loans,  thereby  releasing  the  pledged  securities, 
and  then  convey  the  remaining  assets  and  liabilities  to  the 
new  company  in  exchange  for  the  stated  amounts  of  the 
latter's  stock.  Each  company  is  then  to  donate  to  the 
new  corporation  for  working  purposes  10%  of  the  com- 
mon stock  received  by  it  from  the  new  company;  and  the 
remainder  of  the  common  stock,  together  with  all  of  the 
preferred  stock  received  by  the  corporations,  is  to  be 
distributed  by  them  among  their  respective  stockholders. 
When  this  has  been  done  the  companies  are  to  go  into 
voluntary  liquidation  and  surrender  their  charters. 

The  good-will  allowed  to  the  several  concerns  in  fixing 
the  price  to  be  paid  is  shown  in  the  following  exhibit: 


CONSOLIDATION    BY    MERGER  ^qT 

Apportionment  of  GooivWill 

(Showing  the  amount  of  good-will  allowed  to  each  company) 
Long  Bain  Vine       Bell  & 

Company    Company  Company     Davis         Total 

Purchase   Price $8,000,000  $5,000,000     $900,000  $500,000  $14,400,000 

Former  Capital 
Stock  and  Surplus 
(including  good- 
will)         6,146,800    3,980,000       630,000    355,000     11,111,800 


Additional    G  o  o  d  - 

Will   (included  in 

purchase   price)..  $1,853,200  $1,020,000     $270,000. $145,000    $3,288,200 
Good-Will  Formerly 

on  Books 1,000,000      250,000    1,250,000 


Total  Good- Will.  $2,853,200  $1,020,000     $520,000  $145,000    $4,538,200 


The  outstanding  bonds  and  mortgages  and  accrued 
interest  of  the  merged  concerns  are  to  be  redeemed  with 
an  equivalent  amount  of  the  bonds  of  the  new  company; 
and  in  the  case  of  the  Long  Company,  in  addition  a  10% 
bonus  of  common  stock  of  the  new  company  is  to  be 
given. 

The  Keystone  Trust  Company,  trustee  of  the  mort- 
gage deed  and  of  the  sinking  fund  of  the  Long  Company, 
is  to  act  in  a  similar  capacity  for  the  new  corporation. 

The  present  sinking  fund  of  the  Long  Company 
($740,000)  is  to  remain  in  the  hands  of  the  trustee  and 
to  become  part  of  the  sinking  fund  of  the  new  corporation. 
Beginning  January  i,  1920,  an  annual  deposit  of  $120,000 
is  to  be  made  to  the  sinking  fund,  and  a  reserve  of 
$6,000  for  premium  on  bonds  purchased  by  the  sinking 
fund  trustee  is  to  be  set  aside  annually  out  of  profits 
beginning  December  31,  1920.  The  trustee  is  to  have 
the  right  to  purchase  for  investment,  in  the  open  market, 
outstanding  bonds  of  the  new  company  at  105  and  accrued 


408  CORPORATE   COMBINATIONS 

interest,  at  any  interest  period  after  January  i,  1922.  At 
the  discretion  of  the  directors,  the  bonds  so  held  by  the 
sinking  fund  trustee  may  be  cancelled  at  par  on  the  books 
of  the  company  or  may  be  permitted  to  remain  therein 
as  an  investment. 

Of  the  bonds  of  the  new  corporation  not  required  to 
redeem  the  outstanding  bonds  of  the  merged  companies, 
$1,000,000  face  value  have  been  sold  to  Mitchell  & 
Stevens,  bankers,  at  90,  payable  one-third  down  and  one- 
third  each  three  months  until  paid.  Preferred  stock 
$500,000  is  sold  for  cash  through  Bell  Brothers  & 
Company,  bankers,  with  a  50%  bonus  of  common  stock, 
to  provide  operating  capital. 

§  338.    Requirements  for  the  Consolidation 

From  the  standpoint  of  the  accountant,  the  more 
important  matters  involved  in  the  Long-Bain  consolida- 
tion are  as  follows: 

1.  The  procedure  necessary  to  complete  the  con- 

soUdation  and  to  bring  about  the  dissolution 
of  the  existing  concerns. 

2.  The  opening  entries  on  the  books  of  the  nevvly 

incorporated  Long-Bain  Company,  assuming 
that  a  new  set  of  books  is  to  be  opened, 
that  all  assets  and  liabilities  of  the  Long  Com- 
pany, of  the  Vine  Company,  and  of  Bell  & 
Davis  are  to  be  included  in  the  new  ledger,  and 
that  the  books  and  accounts  of  the  Bain 
Company  will  be  continued  in  the  branch  office. 

3.  The  arrangement  for  the  conduct  of  the  branches, 

assuming  that  the  plant  of  the  Long  Company 
is  to  be  used  as  the  head  office  and  all  the  other 
concerns  operated  as  branches. 


CONSOLIDATION   BY   MERGER  409 

4.  The  closing  entries  of  the  Long  Company,  the 

Vine  Company,  and  the  Bain  Company  at  the 
time  of  dissolution  and  merger. 

5.  The  consolidated  balance  sheet  of  the  new  cor- 

poration after  all  of  the  preceding  requirements 
have  been  carried  out. 

§  339'    Procedure  for  Consolidation 

1.  Agreement  of  Directors.  A  joint  agreement  by 
the  directors  of  each  constituent  company  and  the  partners 
of  the  associated  firm  must  be  entered  into,  fixing  the 
terms  of  the  consolidation. 

2.  Approval  of  Stockholders.  This  joint  agreement 
is  then  submitted  to  the  stockholders  of  each  company 
at  a  meeting  called  for  the  purpose,  of  which  due  notice 
must  have  been  given. 

3.  Application  for  New  Charter.  The  charter  of  the 
proposed  Long-Bain  Manufacturing  Company  must  be 
prepared  and  filed  with  the  Secretary  of  State  of  New 
Jersey,  and  all  other  requirements  prescribed  by  the  laws 
of  New  Jersey  must  be  compHed  with.  The  new  company 
may  be  organized  as  entirely  independent  of  the  con- 
solidated corporations,  or  the  promoters  may  secure 
authority  to  increase  the  stock  of  the  Long  Company 
from  $5,000,000  to  $16,000,000,  and  to  change  its  cor- 
porate name  to  the  Long-Bain  Manufacturing  Company. 

4.  Transfer  of  Property  to  New  Corporation.  All 
assets  and  liabilities  of  the  merged  concerns  must  be 
transferred  or  assigned  to  the  new  Long-Bain  Manufac- 
turing Company.  Personal  properties  are  conveyed  by 
assignment  or  bill  of  sale,  and  real  properties  by  deed. 
The  bank  balance  of  each  concern  must  be  transferred  by 
check.  All  negotiable  papers  must  be  indorsed  over  to 
the  new  company,  and  official  assignment  made  of  other 


4IO  CORPORATE   COMBINATIONS 

documents  such  as  insurance  policies,  contracts,  etc.  The 
outstanding-  mortgages  of  the  dissolving  companies  are 
to  be  exchanged  for  bonds  of  the  new  corporation  at  par. 

5.  Surrender  of  Old  Charters.  Where  the  corpora- 
tions to  be  taken  over  are  not  merged  directly  in  the  ab- 
sorbing corporation,  and  are  not  to  be  kept  in  existence, 
application  must  be  made  to  the  state  by  each  corporation 
for  permission  to  surrender  its  charter.  It  is,  however, 
frequently  found  advisable  to  keep  the  charter  of  "sub- 
merged" companies  alive  in  order  to  prevent  competitors 
from  adopting  the  names  and  benefiting  by  their  former 
connections;  as  an  alternative,  the  names  of  the  merged 
concerns  are  sometimes  carried  on  the  stationery  of  the  new 
corporation. 

The  partnership  of  Bell  &  Davis  has  power  either  to 
dissolve  or  to  sell  out  without  asking  authority  from  the 
state. 

6.  Issue  of  Stock  and  Bonds  of  New  Company.  At 
the  time  the  properties  of  the  old  concerns  are  transferred 
to  the  Long-Bain  Manufacturing  Company,  stock  and 
bonds  of  this  company  are  issued  and  distributed  to  the 
proper  persons  in  accordance  with  the  terms  of  consoli- 
dation. The  stock  apportioned  to  each  company  may  be 
handed  over  to  its  directors,  and  be  by  them  distributed; 
or  certificates  may  be  issued  direct  to  each  individual 
stockholder  for  the  exact  amount  due  to  him.  Usually 
a  trustee  is  appointed  for  this  purpose,  to  whom  the 
separate  stockholders  deliver  or  assign  their  stock  in  the 
old  corporations  in  exchange  for  temporary  trust  receipts, 
and  to  whom  the  new  corporation  issues  the  stock  to  be 
exchanged.  The  trustee  then  delivers  the  new  stock  to 
its  individual  owners  and  surrenders  the  old  stock  to  the 
new    corporation    or   retains   it    for   cancellation.      The 


CONSOLIDATION   BY   MERGER  ^jj 

amount  of  common  stock  to  be  donated  back  to  the  new 
company  by  each  dissolving  concern  might  conveniently 
be  issued  by  the  new  company  to  the  trustee  in  a  separate 
certificate  to  facilitate  the  return  thereof. 

§  340.    Opening  Entries  on  Books  of  New  Corporation 

It  is  desirable  to  have  an  entirely  new  set  of  books 
for  the  newly  organized  corporation,  in  order  that  ample 
and  careful  arrangements  may  be  made  to  accommodate 
the  larger  volume  of  business  and  the  number  of  accounts 
that  must  necessarily  follow  such  an  amalgamation  of 
interests.  When  opening  the  new  ledger  care  should  be 
taken  to  arrange  the  accounts  in  a  systematic  manner 
and  to  leave  sufficient  space  for  each.  If  a  loose-leaf 
ledger  is  to  be  used,  this  latter  precaution  will  not  be 
necessary. 

§  341.     (i)  Entries  for  Issuance  of  Stock  and  Bonds 

The  opening  journal  entries  to  record  the  issue  and 
disposition  of  the  capital  stock  and  to  bring  the  bond  issue 
on  the  books  of  the  new  corporation  are  as  follows: 

January  i,  1916 
First  Entry 

Unissued  Common  Stock $8,000,000 

Unissued  Preferred  Stock 8,000,000 

To  Authorized  Capital  Stock — Com- 
mon    $8,000,000 

"   Authorized    Capital    Stock — Pre- 
ferred    8,000,000 

The  Long-Bain  Manufacturing  Company 
has  been  incorporated  with  a  capital 
stock  of  $16,000,000  as  shown  here- 
with. It  is  to  take  over,  as  per  joint 
agreement,  the  assets  and  liabilities  of, 
and  merge,  the  following  concerns,  to 


412 


CORPORATE   COMBINATIONS 

which  full-paid  stock  is  to  be  issued  in 
full  settlement  as  shown: 

Preferred  Common 
Long  Company.  .$4,000,000  $4,000,000 
Bain  Company. .  2,500,000  2,500,000 
Vine  Company..  450,000  450,000 
Bell  &  Davis 250,000       250,000 


Total  payment  $7,200,000  $7,200,000 
The    remaining 

stock   is   to   be 

disposed   of   as 

follows : 
To     the     under- 

writers    for 

services   .......      100,000        100,000 

To  be  sold  to  the 

public  700,000       700,000 


Total  authorized 

issue $8,000,000  $8,000,000 


Second  Entry 

Long  Company $8,000,000 

Bain  Company 5,000,000 

Vine  Company 900,000 

Bell  &  Davis 500,000 

To  Unissued  Common  Stock $7,200,000 

"    Unissued  Preferred  Stock 7,200,000 

For  stock  issued  to  the  directors  of  the 
above-named  concerns,  as  per  agree- 
ments of  merger.  The  shares  are  issued 
at  par  in  full  payment  for  the  respec- 
tive plants  and  other  assets.  The 
shares  issued  to  each  company  are  as 
follows : 

Preferred  Common 
Long  Company. . . .     40,000       40,000 
Bain    Company....     25,000       25,000 
Vine   Company....       4,500         4,500 
Bell  &  Davis 2,500         2,500 


CONSOLIDATION   BY   MERGER  ^j- 

Third  Entry 

Stock  Subscription  (or  The  Underwriters)...  $200,000 

To  Unissued  Common  Stock $100,000 

"    Unissued  Preferred  Stock 100,000 

For  subscriptions  to  1,000  shares  of  common 
stock  and  1,000  shares  of  preferred,  to  be 
paid  for  in  professional  services. 

This  issue  of  stock  might  be  charged  directly  to 
organization  expense  if  desired. 

The  following  entry  is  necessary  to  bring  the  bond 
issue  on  the  books: 

Fourth  Entry 

Unissued  Bonds $5,000,000 

To  First  Mortgage  Bonds -  $5,000,000 

Authorization  of  $5,000,000  of  first  mort- 
gage 5%  thirty-year  sinking  fund 
bonds  in  denominations  of  $1,000  and 
$10,000. 

§  342.     (2)  Entries  for  Assets  and  Liabilities  Taken  Over 

The  entries  for  issuance  of  stock  and  bonds  are  now 
complete,  and  the  next  step  is  to  take  over  the  assets  and 
liabilities  of  the  merging  concerns  in  full  payment  for 
their  subscriptions.  A  separate  entry  is  here  made  for 
each,  though  it  is  obvious  that  the  various  assets  and 
liabilities  could  be  amalgamated  into  one  comprehensive 
entry.  In  that  case  the  entry,  would  state  the  aggregate 
of  the  items  taken  over,  instead  of  the  separate  amounts. 

First  Entry  (Transfer  of  Long  Company's  Assets  and  Liabilities) 
Sundry  Assets  to  Sundry  Liabilities : 

Assets 

Cash* $342,800 

Notes  Receivable 340,600 

Accounts  Receivable 1,021,300 

Prepaid  Charges 46,200 

•After  the  payment  of  $230,000  in  dividends. 


414 


CORPORATE   COMBINATIONS 


Investments   500,000 

Stock  and  Material 964,300 

Supplies 175,100 

Due  from  Bain  Company 85,000 

Furniture  and  Fixtures 125,000 

Patents,  Patterns,  and  Tools 450,000 

Buildings  and  Plant 4,390,000 

Sinking  Fund 740,000 

Good- Will 2,853,200 

Liabilities 

Notes  Payable $685,000 

Accounts  Payable 350,000 

Accrued  Charges 37,900 

Reserve  for  Depreciation 345,100 

Reserve  for  Bad  Debts 10,000 

Reserve  for  Insurance 105,500 

Bonds  of  Long  Company 2,500,000 

Long  Company 8,000,000 

The  above  assets  and  liabilities  of  the 

Long  Company  have  been  taken  over 

this  day  at  the  valuations  shown,  as 

per  report  of  the   engineers  and  ac- 
countants, in  full  payment  for  $8,000,- 

000  capital  stock  of  this  Company,  as 

per  order  of  the  directors  and  agree- 
ments   previously    entered    into.      An 

equivalent  of  common  and  preferred 

stock    has    been    issued    in    exchange 

therefor,  as  per  agreement. 

Total  assets $12,033,500 

Total  liabilities 4,033,500 

Capital  issued 8,000,000 

Second  Entry  (Transfer  of  Assets  and  Liabilities  of  Bell  &  Davis) 
Sundry  Assets  to  Sundry  Liabilities : 

Assets 

Cash* $6,100 

Notes  Receivable 1 14,000 

•After  payment  of  $30,000   secured  loans. 


CONSOLIDATION   BY   MERGER  41  e 

Accounts  Receivable 82,400 

Prepaid  Charges 4,000 

Investments    60,000 

Stock  and  Material 152,000 

Supplies 12,400 

Due  from  Bain  Company 16,000 

Furniture  and  Fixtures 14,000 

Patents,  Patterns,  and  Tools 92,000 

Buildings  and  Plant 1 10,000 

Good- Will 145,000 

Liabilities 

Notes  Payable $75,100 

Accounts  Payable 205,100 

Accrued  Charges 6,200 

Reserve  for  Bad  Debts 1,000 

Mortgage  of  Bell  &  Davis 20,000 

Interest  Accrued 500 

Bell  &  Davis 500,000 

(Full  explanation  required,  as  above.) 

The  assets  and  liabilities  of  the  Vine  Company  are 
transferred  to  the  books  of  the  new  company  in  like 
manner  after  the  deduction  of  the  $30,000  to  be  paid  out  in 
dividends. 

As  the  assets  and  liabilities  of  the  Bain  Company  are 
to  be  retained  and  carried  in  its  own  ledger,  they  are  not 
to  be  taken  into  the  home  office  accounts.  The  books  of 
this  company  are  to  be  kept  as  heretofore  and  the  only 
change  apparent  will  be  that  of  ownership,  with  a  reflected 
increase  in  capital,  surplus,  and  good-will  accounts.  The 
ownership  of  this  branch  will  be  represented  in  the  home 
office  books  in  a  distinguishing  account,  as  "Bain  Plant," 
"Bain  Branch,"  "Investment  in  Bain  Plant,"  or  under 
some  other  suitable  caption.  Since  this  plant  cost 
$5,000,000,  it  will  therefore  be  represented  at  the  same 
valuation  on  the  new  company's  books.  The  entries  are 
as  follows: 


4i6  CORPORATE   COMBINATIONS 

Bain  Plant  Investment $5,000,000 

To  Bain  Company $5,000,000 

For  transfer  from  Bain  Company  of  all 
assets,  liabilities,  etc.,  valued  at  $5,000,- 
000,  as  per  statements  on  file,  in  ex- 
change for  an  equivalent  of  stock  of 
this  Company,  as  per  agreement. 

Certain  of  the  assets  of  the  Bain  branch  might  with 
advantage  be  included  in  the  home  office  accounts  (§  350), 
in  which  case  the  above  amount  would  be  correspondingly 
reduced. 

At  this  time  the  following  entries,  which  are  self- 
explanatory,  might  also  be  made: 

Incorporation  Expenses $25,000 

To  Cash $25,000 

For  incorporation  expenses  and  other  charges, 
including  professional  services  of  attorneys 
and  accountants. 

Treasury  Stock $720,000 

To  Donated  Capital  (or  Donated  Surplus)  $720,000 

The  consolidating  companies  have  this  day 
donated  to  the  Long-Bain  Company,  for 
working  purposes,  one-tenth  of  their  hold- 
ings of  common  stock — 10%  of  $7,200,000 
equals  $720,000,  entered  at  par  value. 

This  transaction  should  be  completed  before  the  final 
issue  of  certificates  has  been  made  to  the  various 
stockholders. 

§  343*     (3)  Entries  for  Retirement  of  Outstanding  Bonds 
and  Mortgages  of  the  Merging  Concerns 

First  Entry 

Bonds  of  Long  Company $2,500,000 

Mortgage  of  Bell  &  Davis 20,000 


CONSOLIDATION    BY    MERGER  417 

Interest  Accrued 500 

Bain  Plant  Investment 304,500 

Mortgage  of  Vine  Company 250,000 

To  Unissued  Bonds $3i075,ooo 

For  refunding  of  all  outstanding  bonds 
and  mortgages  of  the  merging  con- 
cerns, per  merger  agreement,  entry  of 
Bain  Plant  Investment  including  mort- 
gage of  Bain  Company  and  accrued 
interest  on  same  $4,500. 

Since  the  bonds  of  the  Long  Company  and  the 
mortgages  of  the  Vine  Company  and  of  Bell  &  Davis, 
with  accrued  interest,  have  been  included  in  the  accounts 
of  the  new  company,  they  can  be  readily  cancelled  by  an 
offsetting  entry.  This  is  not  true,  however,  of  the 
mortgage  of  the  Bain  Company  branch,  since  all  accounts 
are  retained  in  its  own  book.  The  outlay  on  account  of 
this  branch  must  then  be  regarded  either  as  an  additional 
expenditure  or  as  an  investment  therein  and  charged  up 
accordingly.  It  can  hardly  be  considered  an  additional 
investment  in  the  true  sense  of  the  word,  since  there  is  an 
equivalent  issue  of  bond  obligations;  but  the  liability  is 
transferred  from  the  branch  books  to  the  home  office 
books. 

Second  Entry 

Donated  Capital $250,000 

To  Treasury  Stock $250,000 

A  bonus  of  donated  common  stock  given  to 
holders  of  refunded  bonds  of  the  Long 
Company,  10%  of  $2,500,000. 

§  344.     (4)  Entries  Relating  to  Sale  of  Securities 

First  Entry 

Incorporation  Expenses $200,000 

To  Stock  Subscription  (or  Underwriters)  $200,000 


4i8  CORPORATE   COMBINATIONS 

Being  an  issue  of  stock  to  the  underwriters 
of  this  Company  for  services  rendered  in 
organizing,  and  in  full  payment  of  their 
subscriptions : 

i,ooo  shares  common $100,000 

1,000  shares  preferred 100,000 

Second  Entry 

Mitchell  &  Stevens,  Bankers $900,000 

Discount  on  Bonds 100,000 

To  Unissued  Bonds $1,000,000 

For  sale  of  $1,000,000  par  of  bonds  to  bank- 
ers at  90,  payable  one-third  down  and 
one-third  each  three  months. 

Third  Entry 

Cash    $300,000 

To  Mitchell  &  Stevens,  Bankers $300,000 

First  payment  of  one-third  on  account  of 
bond  sale. 

Fourth  Entry 

Cash $500,000 

To  Unissued  Preferred  Stock $500,000 

For  sale  of  $500,000  par  of  preferred  stock 
to  Bell  Brothers  &  Company,  bankers. 
Full  payment  received  in  cash ;  50%  bonus 
of  common  stock  given  as  entered  below.  '    - 

Fifth  Entry 

Donated    Capital. $250,000 

To  Treasury  Stock $250,000 

Bonus  of  common  stock  given  to  Bell 
Brothers  &  Company,  being  50%  of  cash 
sale  of  $500,000  of  preferred  stock. 

§  345-     (5)  Entry  in  Settlement  of  Intercompany  Obliga- 
tions 

The  following  entry  in   settlement   of  intercompany 
obligations  would  be  made  as  soon  as  the  Bain  plant  is 


CONSOLIDATION   BY   MERGER  419 

in  a  position  to  spare  the  cash.  This  indebtedness  could 
have  been,  and  usually  is,  settled  before  making  the 
transfer;  otherwise  it  could  be  included  in  the  regular 
personal  accounts. 

Cash $101,000 

To  Due  from  Bain  Company $101,000 

To  settle  claims  owing  by  the  Bain  Com- 
pany at  time  of  amalgamation,  and  which 
were  carried  into  the  accounts  of  this 
Company  as  follows: 

Owing  to  Long  Company $85,000 

Owing  to  Bell  &  Davis 16,000 

There  is  nothing  special  to  be  done  with  the  sinking 
fund  at  this  time,  and  it  will  stand  on  the  books  of  the 
new  corporation  as  it  formerly  stood  on  the  books  of  the 
Long  Company,  until  additional  instalments  are  deposited 
therein.  All  interest  accumulations  thereon  must,  of 
course,  be  added  from  time  to  time  as  they  are  reported 
by  the  trustee.  It  will  be  noted  that  the  trustee  has 
authority  to  use  the  sinking  fund  for  the  purchase  of 
outstanding  bonds  of  the  company. 

In  anticipation  of  the  bond  redemption  at  105,  the 
company  is  to  begin,  on  January  i,  1920,  to  set  aside  out 
of  profits  an  annual  reserve  of  $6,000  to  ofifset  bond 
premium,  which  may  be  credited  to  Reserve  for  Bond 
Premium.  When  the  bonds  are  called  at  a  premium,  such 
premium  is  charged  against  the  reserve. 

§  346.    The  Conduct  of  the  Branches 

There  are  two  main  systems  of  conducting  branch 
houses:  in  the  one,  all  accounts  are  kept  in  the  books  of 
the  home  office  and  all  collections  are  made  therefrom,  all 
business  transacted  at  the  branches  being  reported  daily 
to  the  home  of^fice;  in  the  other,  all  accounts  and  records 


420 


CORPORATE   COMBINATIONS 


are  kept  at  the  branch  offices  and  reports  are  made  to  the 
home  office  from  time  to  time. 

As  all  the  assets  and  liabilities  of  the  Vine  Company 
and  of  Bell  &  Davis  have  been  taken  onto  the  home  office 
books,  it  may  be  assumed  that  these  branch  offices  are  to 
be  handled  under  the  first  plan — practically  as  selling 
agencies.  It  is  evident  that  the  Bain  plant  is  to  be 
handled  under  the  second  plan,  the  assets  and  liabiHties 
being  continued  in  its  own  ledgers  and  its  own  complete 
set  of  books  being  maintained  as  before.  Therefore,  any 
adjustments  necessary  in  the  transfer  of  ownership  and 
liquidation  of  certain  liabilities  must  necessarily  be  made 
in  these  books.  This  branch  will  keep  all  accounts  per- 
taining to  its  business  affairs  and  report  periodically  to  the 
home  office. 

In  the  Vine  Company  and  Bell  &  Davis  office3, 
triplicate  copies  will  be  made  of  each  invoice;  the  original 
will  be  given  to  the  customer,  the  duplicate  forwarded  to 
the  home  office,  and  the  triplicate  kept  on  file  at  the 
branch.  A  like  plan  is  followed  in  connection  with  all  ■ 
other  transactions,  thus  enabHng  the  home  office  to  record 
each  day  the  various  sales,  purchases,  and  expenses  of 
these  branches. 

Cash  or  merchandise  sent  from  the  home  office  to  the 
branches  is  charged  to  them,  and  remittances  of  cash  or 
merchandise  from  the  branches  to  the  home  office  are 
credited  to  the  branches.  Goods  or  cash  sent  from  one 
branch  to  another  must,  of  course,  be  reported  to  the 
home  office  promptly  so  that  interbranch  debits  and 
credits  may  be  made. 

Since  the  office  of  the  Long  Company  becomes  the 
head  office,  no  material  changes  are  necessary  in  its 
methods  of  account-keeping,  though  a  new  general  ledger 
is  assumed  to  have  been  opened. 


.    CONSOLIDATION   BY   MERGER  421 

§  347.    Closing  Entries  for  Long  Company 

In  these  illustrative  entries  many  of  the  details  and 
computations  used  in  arriving  at  results  are  omitted. 
They  are  usually  all  proved  by  the  accountant,  however, 
in  his  working  papers  and  can  be  referred  to  at  any  time 
during  the  process  of  consolidation. 

First  Entry 

Dividend  Payable $230,000 

To  Cash $230,000 

For  payment  of  dividend  due  today. 

Second  Entry 

Good-Will $1,853,000 

To  Surplus $1,853,000 

This  Company  has  agreed  to  merge  with 

and  sell  out  to  the  Long-Bain  Manu- 
facturing Company  for  $8,000,000,  as 

per  agreement  executed  this  day,  and 

as  per   order   of  the   directors.     The 

good-will  allowed   in   addition   to   the 

$1,000,000    already    on    the    books    is 

$1,853,000. 

Third  Entry 

Long-Bain  Manufacturing  Company $12,033,500 

To  Sundry  Assets : 

Cash $342,800 

Notes   Receivable 340,600 

Accounts  Receivable 1,021,300 

Prepaid  Charges 46,200 

Investments    500,000 

Stock  and  Material 964,300 

Supplies 175,100 

Due  from  Bain  Company 85,000 

Furniture  and  Fixtures 125,000 

Patents,  Patterns  and  Tools 450,000 

Building  and  Plant 4,390,000 

Sinking   Fund 740,000 

Good-Will 2,853,200 


422  CORPORATE  COMBINATIONS 

For  all  assets  turned  over  in  payment  of 
subscription  to  $8,000,000  of  stock,  as 
per  resolution  of  the  directors  and 
stockholders. 

Fourth  Entry 
Sundry  Liabilities: 

Notes  Payable $685,000 

Accounts  Payable 350,000 

Accrued  Charges 37>900 

Reserve  for  Depreciation 345,100 

Reserve  for  Bad  Debts 10,000 

Reserve  for  Insurance 105,500 

First  Mortgage  Bonds 2,500,000 

To  Long-Bain  Manufacturing  Com- 
pany    $4,033»500 

For  all  liabilities  of  Long  Company  as- 
sumed by  the  Long-Bain  Company  as 
per  agreement. 

Fifth  Entry 

Stock  of  Long-Bain   Mahufacturing  Com- 
pany    $8,000,000 

To  Long-Bain  Manufacturing  Com- 
pany    $8,000,000 

For  $8,000,000  of  the  capital  stock  of  the 
Long-Bain  Manufacturing  Company 
received  this  day,  as  per  agreement, 
in  full  payment  for  plant,  assets,  and 
liabilities  turned  over  and  transferred 
according  to  legal  requirements : 
40,000  shares  common  stock  $4,000,000 
40,000  shares  preferred  stock    4,000,000 


Total $8,000,000 

Sixth  Entry 

Surplus   $400,000 

To  Stock  of  Long-Bain  Manufactur- 
ing Company $400,000 


.    CONSOLIDATION   BY   MERGER  423 

For  donation  of  10%  of  the  allotment  of 
$4,000,000  common  stock,  to  be  used 
by  the  Long-Bain  Company  for  work- 
ing purposes. 

Seventh  Entry 

Capital  Stock $4,600,000 

Surplus   3,000,000 

To  Sundry  Stockholders $7,600,000 

For  allotment  of  stock  of  the  Long-Bain 
Company  to  the  individual  stockhold- 
ers in  proportion  to  holdings. 

The  distribution  of  stock  must,  of  course,  be  made  in 
the  proportion  decided  upon  by  the  stockholders  them- 
selves, and  it  is  evident  that  uneven  amounts  of  both 
classes  of  stock  will  obtain.  In  some  cases  to  make  an 
equitable  adjustment,  money  will  have  to  be  passed  for 
the  equalization  of  shares. 

Eighth  Entry 

Sundry  Stockholders $7,600,000 

To  Stock  of  Long-Bain  Manufactur- 
ing Company $7,600,000 

For  distribution  of  the  common  and  pre- 
ferred stock  of  the  above  company  in 
accordance  with  allotment  agreement. 

§  348.    Closing  Entries  for  Vine  Company ;  Bell  &  Davis 

Similar  adjusting  and  closing-  entries  are  required  on 
the  books  of  the  Vine  Company,  setting  up  the  necessary 
accounts  for  clearing  the  transaction  and  distributing  the 
newly  acquired  stock. 

Closing  entries  for  Bell  &  Davis  are  similar  to  those 
given  in  §§  167-169. 

§  349'    Closing  Entries  for  Bain  Company 

Since  the  operating  accounts  of  this  company  are  to 


424 


CORPORATE   COMBINATIONS 


remain  on  the  books  of  the  branch,  it  is  manifest  that  only 
certain  adjusting  entries  are  necessary  at  this  time.  They 
are  as  follows: 

First  Entry 

Good- Will $1,020,000 

To  Surplus $1,020,000 

For  sale  value  of  plant  and  net  worth  in 
excess  of  present  book  value.  (Full 
explanation  here.) 

Second  Entry 

Dividend  Payable $105,000 

To  Cash $105,000 

For  payment  of  dividend  due  today. 

Third  Entry 

Secured  Loans $100,000 

To  Cash $100,000 

For  payment  of  secured  loans. 

Fourth  Entry 

Investments   $120,000 

To  Pledged  Securities $120,000 

For  return  of  pledged  securities  upon 
payment  of  loan. 

Fifth  Entry 

Stock  of  Long-Bain   Manufacturing  Com- 
pany    $5,000,000 

To  Long-Bain  Manufacturing  Com- 
pany    $5,000,000 

For  common  and  preferred  stock  of  the 
Long-Bain  Company  received  in  full 
payment  for  plant,  assets,  and  liabili- 
ties: 

25,000  shares  common ....  $2,500,000 
25,000  shares  preferred. . . .     2,500,000 

Total $5,000,000 


CONSOLIDATION    BY    MERGER  ^e 

Sixth  Entry 

Surplus $250,000 

To  Stock  of  Long-Bain  Manufactur- 
ing Company $250,000 

For  donation  of  2,500  shares  common 
stock  back  to  the  Long-Bain  Company 
for  working  purposes. 

Seventh  Entry 

Capital  Stock $3,500,000 

Surplus    1,250,000 

To  Sundry  Stockholders $4,750,000 

For  allotment  of  stock  in  the  new  cor- 
poration, in  proportion  to  holdings. 

Eighth  Entry 

Sundry    Stockholders $4,750,000 

To  Stock  of  Long-Bain  Manufactur- 
ing Company $4,750,000 

For  distribution  of  stock,  as  per  agree- 
ment of  adjustments. 

Ninth  Entry 

Mortgage   Payable $300,000 

Interest  Accrued 4,500 

To  Long-Bain  Manufacturing  Com- 
pany (Home  Office) $304,500 

For  payment  of  mortgage  and  accrued 
interest  by  the  Long-Bain  Company 
by  an  equivalent  exchange  of  5%  bonds. 

Tenth  Entry  (For  payment  of  interbranch  obligations  when  cash 
is  ample,  as  per  agreement) 

Accounts  Payable $101,000 

To  Cash $101,000 

Payment  of  accounts  due : 

Long  Company $85,000 

Bell  &  Davis 16,000 

§  350.    Balance  Sheet  of  Bain  Branch 

The  ledger  accounts  maintained  on   the  Bain   branch 


426 


CORPORATE   COMBINATIONS 


books  are  reflected  in  the  accompanying  balance  sheet, 
showing  the  proprietorship  interest  of  $5,304,500  standing 
to  the  credit  of  the  Long-Bain  Alanufacturing  Company. 
Certain  of  the  assets  could,  with  some  advantage,  be 
transferred  to  the  home  office  books  and  removed  from 
the  branch  ledger,  such  as  the  investments,  buildings  and 
plant  (particularly  the  real  estate).  Depreciation  reserve 
and  good-will  might  also  be  transferred.  This  would  leave 
only  working  accounts  on  the  branch  ledger,  and  a  credit 
of  $776,000  to  the  home  office  account.  The  accountant 
must,  of  course,  suit  his  entries  to  existing  conditions. 

Balance  Sheet  of  the  Bain  Branch 

(After  sale  to  the  Long-Bain  Company,  showing  open  ledger  accounts.) 


Cash    $67,500.00 

Notes  Receivable  ....  135,800.00 

Accounts    Receivable.  492,750.00 

Prepaid   Charges 38,150.00 

Investments   270,000.00 

Stock  and   Material..  510,000.00 

Supplies    51,900.00 

Furniture       and 

Fixtures    62,000.00 

Patents,  Patterns,  and 

Tools   244,850.00 

Buildings  and  Plant..  3,359,000.00 

Good-Will    1,020,000.00 


$6,251,950.00 


Notes    Payable $270,000.00 

Accounts   Payable*. . .      540,000.00 
Accrued    Charges....        11,640.00 
Reserve     for     Depre- 
ciation         120,500.00 

Reserve        for        Bad 

Debts     5,310.00 

Long-Bain  Company 
Home  Office  Ac- 
count     5,304,500.00 


$6,251,950.00 


§  351*    Consolidated  Balance  Sheet  of  New  Corporation 

The  consolidated  balance  sheet  which  follows  is  prac- 
tically a  trial  balance  of  the  ledger  accounts  after  the 
incorporation  of  the  new  company. 


•Intercompany   obligations   of  $101,000  included,   not   to   be   paid   until    cash    is 
ample. 


CONSOLIDATION  BY  MERGER 

Consolidated  Balance  Sheet 
Of  the  Long-Bain  Manufacturing  Company 

As  OF  January  i,  1916 
(After  Incorporation  and  Merging) 


427 


Assets 

Liabilities  and  Capital 

Cash    

$1,228,700.00 

Notes    Payable 

$910,100.00 

Notes    Receivable . . . 

523,700.00 

Accounts     Payable.. 

757,700.00 

Accounts  Receivable. 

1,266,500.00 

Accrued    Charges . . . 

52,300.00 

Prepaid  Charges 

59,400.00 

Reserve    for    Depre- 

Investments: 

ciation     

399,100.00 

Bain  Branch  Plant 

5,304,500.00 

Reserve      for      Bad 

Stock      of     Other 

560,000.00 

Debts    

12,200.00 

Companies   

Reserve     for    Insur- 

Stock and  Material. 

1,305,100.00 

ance   

105,500.00 

Supplies    

195,300.00 

Donated    Capital 

220,000.00 

Furniture    and    Fix- 

First    Mortgage 

tures    

161,000.00 

Bonds    

Authorized       Capital 

5,000,000.00 

Patents,        Patterns, 

and    Tools 

674,500.00 

Stock    Preferred.. 

8,000,000.00 

Buildings  and  Plant. 

4,950,000.00 

Authorized       Capital 

Sinking  Fund  Trus- 

Stock   Common... 

8,000,000.00 

tee    

740,000.00 

Incorporation        Ex- 

penses     

225,000.00 

Discount  on   Bonds. 

100,000.00 

Treasury    Stock 

220,000.00 

Unissued  Bonds 

925,000.00 

Unissued     Preferred 

Stock  

200,000.00 

Unissued      Common 

Stock  

700,000.00 

Mitchell    &    Stevens, 

Bankers    

600,000.00 

Good-Will*   

3,518,200.00 

$ 

$23,456,900.00 

23456,900.00 

•Comprising  the  good-will  of  the  Long  Company,  the  Vine  Company,  and  of 
Bell  &  Davis.  The  good-will  of  the  Bain  Company  is  included  in  the  account 
of  the  Bain  branch  plant,  shown  under  "Investments." 


428 


CORPORATE  COMBINATIONS 


§  352.    Consolidation  by  Purchase 

Under  this  plan  of  merger  (§  326),  one  company  pur- 
chases outright  the  properties  of  one  or  more  companies. 
The  general  plan  and  the  book  entries  involved  do  not 
differ  materially  from  those  already  fully  explained  under 
consolidation  by  merger,  except  that  in  an  outright  pur- 
chase there  need  not  be  any  application  to  the  state  other 
than  for  dissolution  of  the  selling  companies.  They 
surrender  their  charters  to  the  state  according  to  pre- 
scribed legal  procedure. 


CHAPTER   XXX 

CONSOLIDATION    BY    LEASE 

§  353-    Leases 

A  common  method  of  securing  control  of  a  competing 
concern  is  to  rent  its  plant  or  property  for  a  term  of  years 
— a  plan  extensively  used  by  transportation  companies  to 
gain  possession  of  connecting  lines.  By  this  method  com- 
petition is  eliminated  and  the  lessee  company  obtains 
valuable  connections  and  a  going  business  without 
incurring  the  cost  and  delay  of  building  operations.  The 
lessor,  on  the  other  hand,  besides  being  relieved  of  the 
operation  of  its  properties,  may  receive  more  satisfactory 
returns  in  the  form  of  rentals. 

Leases  commonly  run  from  i  to  50  years,  but  may 
extend  to  99  years,  and  occasionally  to  999  years;  such  a 
lease  is  equivalent  to  permanent  ownership,  so  much  so 
that  the  operating  company  may  improve  the  properties 
without  any  hesitancy.  Short  term  leases  usually  include 
the  option  of  a  renewal  on  the  same  or  on  specified  terms. 
The  lessor  company,  as  a  rule,  continues  to  maintain  its 
separate  existence,  but  its  activities  consist  merely  in 
receiving  and  disbursing  moneys  in  the  form  of  expenses, 
dividends,  etc. 

Nearly  all  leases  require  the  operating  company  to  pay 
taxes,  insurance,  and  up-keep  expenses  of  the  leased 
properties,  and  to  undertake  other  obligations  of  a  more 
or  less  rigid  nature.  In  mining  operations  the  terms  of 
the  lease  usually  require  the  payment  of  a  certain  amount 
per  ton  on  the  output  of  ore,  with  a  specified  minimum 

429 


430 


CORPORATE  COMBINATIONS 


output,  while  in  the  case  of  a  railroad  or  similar  property 
the  payment  is  likely  to  be  a  specified  rental  or  a  guar- 
anteed dividend  on  the  lessor's  outstanding  stock,  with 
perhaps  some  participation  in  profits. 

The  lessor  is  given  access  to  the  accounts  and  records 
of  the  lessee  as  far  as  they  relate  to  the  leased  property 
during  the  life  of  the  lease.  Leases  of  large  properties 
are  usually  matters  of  public  record  and  the  details  thereof 
accessible  to  the  public. 

§  354.    Entries  for  Property  Leased 

Leased  properties  continue  in  the  ownership  of  the 
lessor  and  must  be  returned  at  the  expiration  of  the  lease. 
Where  the  properties  taken  over  are  of  such  a  nature 
that  they  are  merged  and  perhaps  consumed,  as  for  in- 
stance, equipment  and  supplies,  the  lessee  usually  absorbs 
them  into  its  own  accounts  and  at  the  expiration  of  the 
lease  either  pays  for  them  in  cash  or  returns  other 
equivalent  assets.  The  assets  so  absorbed  may  be  charged 
to  the  property  accounts  already  in  the  ledger  and  credited 
to  the  lessor,  or  else  be  charged  to  separate  accounts. 

The  record  of  leased  property  stands  as  entered  until 
the  lease  expires,  while  repairs  and  minor  improvements 
on  the  property  are  usually  charged  to  operating  ex- 
penses. Permanent  improvements  would  usually  be 
charged  against  the  lessor,  the  matter  being  determined 
by  the  terms  of  the  lease.  On  the  balance  sheet,  leased 
properties  and  the  owner's  credits  may  appear  among  the 
assets  and  liabilities  as  cancelling  amounts,  or  may  be 
entered  on  both  sides  "in  short,"  in  order  to  indicate 
their  relation  to  other  items;  or  they  may  be  mentioned 
in  a  footnote  to  the  balance  sheet,  or  even  be  omitted 
entirely.  If  they  are  merged  and  included  in  the  lessee's 
properties,  a  footnote  may  or  may  not  be  necessary,  but 


CONSOLIDATION  BY  LEASE  ^^I 

in  that  case  the  lessor's  account  must  be  included  in  the 
liabilities. 

Corresponding,  though  reverse,  entries  should  be  made 
on  the  books  of  the  lessor  for  the  properties  conveyed  by 
the  lease,  in  case  it  is  decided  to  make  book  entries  at  all. 
It  would  seem  good  practice  to  debit  the  leasing  company 
and  credit  the  property  leased,  but,  if  all  the  property 
owned  by  the  lessor  is  taken,  there  would  be  nothing 
gained  by  so  doing.  This  entry  would,  of  course,  be 
suitable  where  only  a  part  of  the  property  is  conveyed, 
in  order  to  distinguish  between  properties  leased  to  others 
and  properties  operated. 

§  355*    Entries  for  Guarantees 

When  guarantees  of  interest  or  dividends  are  included 
in  the  terms  of  a  lease,  book  entries  are  not  absolutely 
necessary  to  record  the  contingent  liability  incurred;  and 
yet  it  is  good  business  practice  so  to  record  such  lia- 
bilities as  to  keep  the  obligation  continually  before  the 
stockholders. 

The  Pennsylvania  Railroad  Company  does  not  enter 
such  guarantees  in  its  ledger  accounts,  but  in  its  annual 
report  a  complete  list  of  them  is  included.  If  book  entries 
are  made  for  guarantees,  they  must  obviously  be  for  record 
only,  because  as  contingent  entries  they  would  offset  each 
other  in  the  accounts.  In  the  annual  balance  sheet  they 
should  be  exhibited  either  among  the  accounts  (in  short 
or  otherwise),  or  as  a  footnote  thereto. 

§  356.    Lease  Terms 

To  illustrate  the  entries  required  when  properties  are 
leased  by  a  corporation,  assume  that  the  Vermont  Mining 
and  Smelting  Company  has  leased  a  mine  from  the  Union 
Mining  Company  for  a  term  of  thirty  years.     The  prop- 


432 


CORPORATE  COMBINATIONS 


erties  taken  over  comprise  the  mine,  valued  at  $400,000, 
buildings  and  equipment  valued  at  $30,000,  and  supplies 
valued  at  $8,500.  At  the  termination  of  the  leas€  the 
properties  are  to  be  returned  to  the  Union  Mining  Com- 
pany in  as  good  condition  as  when  taken  over,  except  as 
to  the  ore  mined.  The  Vermont  Mining  and  Smelting 
Company  agrees  to  pay  as  rental  for  the  mine  a  guaranteed 
annual  dividend  of  4%  on  the  Union  Mining  Company's 
capital  stock  of  $1,000,000  during  the  Hfe  of  the  lease,  and 
a  royalty  of  10  cents  per  ton  for  every  ton  of  ore  mined. 

The  Vermont  Mining  and  Smelting  Company  leases 
also  a  short  railroad  and  its  equipment,  valued  at 
$3,000,000,  of  the  Wilson  Transportation  Company.  The 
lease  is  to  run  for  thirty  years,  at  the  end  of  which  time 
the  property  is  to  be  returned  in  good  condition.  The 
lessee  is  to  guarantee  during  the  existence  of  the  lease  an 
annual  dividend  of  6%  on  the  capital  stock  ($2,000,000) 
of  the  lessor  company  as  rental,  and  is  in  addition  to  pay 
all  taxes,  improvement  expenses,  and  interest  on  the  out- 
standing bonds,  and  to  make  all  needed  replacements. 

The  Vermont  Company  finds  it  necessary  to  expend 
for  improvements  on  the  Union  Mining  Company  property 
$100,000,  and  on  the  railway  $400,000;  and  in  order  to 
secure  funds  for  this,  the  company  issues  $500,000  of 
short  term  notes  payable  $100,000  each  year  for  five  years 
and  drawing  6%  interest.  The  notes  are  secured  by  a 
deposit  with  the  trustee  of  $500,000  stock  of  the  Lone 
Ridge  Mines  Company,  a  successful  subsidiary.  The  notes 
are  sold  at  95  to  a  banking  firm. 

The  output  of  ore  from  the  leased  mine  during  191 6 
is  122,000  tons,  and  the  net  income  therefrom  to  the 
lessee  after  paying  operating  and  repair  expenses  is 
$85,000,  out  of  which  the  rental  must  be  paid.  The  Union 
Mining  Company  is  able,  out  of  the  rental  received,  to 


CONSOLIDATION   BY   LEASE  4,, 

apply  3%  of  the  value  of  the  mine  leased  on  its  extinguish- 
ment fund  and  also  to  apply  to  the  dividend  fund  21/2% 
on  its  capital  stock. 

The  operations  of  the  leased  railway  for  the  year  are 
shown  in  the  following  summary: 

Gross  Freight  Earnings $750,000.00 

Operating  Expenses $230,000.00 

Replacements  and  Repairs 145,800.00 

Improvements,  etc.,  charged  off 14,000.00 

Guaranteed  Dividend  to  Lessor 120,000.00      509,800.00 

Net  Earnings $240,200.00 

The  accounting  procedure  to  be  considered  in  con- 
nection with  the  foregoing  transactions  involves  entries 
for: 

1.  Lease  of  the  mine  and  equipment. 

2.  Lease  of  the  railway  and  equipment. 

3.  Issue  of  notes  and  expenditures  for  improvements 

on  leased  properties. 

4.  Distribution   of  rentals   of  leased   properties   at 

end  of  first  year. 

5.  Union  Mining  Compan}'  at   the  beginning  and 

end  of  the  first  year. 

6.  Wilson  Transportation  Company  at  the  end  of 

the  year's  operations  under  the  lease. 

§  357.    Entries  for  Lease  of  Mine 

It  is  natural  to  suppose  that  the  lessee  will  aim  to  secure 
from  the  mine  during  the  life  of  the  lease,  all  of  its  ore, 
unless  the  lease  contains  some  limitations.  The  outlay 
for  improvements  and  extensions  made  by  the  lessee  must 
be  written  ofif  during  the  life  of  the  lease  as  operating 
expenses,  excepting  as  to  any  movable  equipment  belong- 
ing to  the  lessee.    The  mine  buildings  and  equipment  are 


434 


CORPORATE   COMBINATIONS 


valued  at  $30,000,  and  must  be  returned  when  the  lease 
expires.  The  supplies  taken  over  are  valued  at  $8,500, 
and  must  be  made  good  when  the  lease  expires.  Assuming 
that  the  Vermont  Company  decides  to  bring  these  prop- 
erties into  its  own  accounts,  the  following  entry  is  made; 

Leased  Properties  of  Mining  Company $438,500 

To  Union  Mining  Company  for  Leased 

Properties  $438,500 

For  mine,  valued  at  $400,000,  buildings  and 
equipment  at  $30,000,  and  supplies  at  $8,- 
500,  taken  over  under  thirty-year  lease,  to 
be  returned  at  expiration  thereof. 

It  will  be  seen  that  one  entry  offsets  the  other.  They 
must  stand  thus  in  the  ledger  accounts  until  the  lease 
matures  and  then  be  eliminated  by  a  counterbalancing 
entry. 

Under  an  alternative  plan  that  is  also  good  practice, 
no  entry  in  the  books  is  necessary  for  the  leased  proper- 
ties, save  the  record  of  the  transaction  in  the  minutes  of 
the  directors  and  stockholders. 

The  improvements  on  the  mining  property,  costing 
$100,000,  should  be  charged  to  "Improvements  Account 
of  Union  Mine,"  and  then  written  off  one-thirtieth  each 
year  during  the  life  of  the  lease.  Any  improvements  of 
succeeding  years  may  be  spread  over  the  remaining  years 
of  the  lease's  existence.  Expenditures  for  the  up-keep  of 
buildings  and  equipment,  replacements  and  supplies, 
should  be  charged  like  the  regular  company  expenses  to 
Operating  Expense  account. 

§  358.    Entries  for  Lease  of  Railway 

The  same  general  accounting  procedure  may  be  fol- 
lowed for  the  leased  railway  property  as  for  the  leased 
mine.    Both  road  and  equipment  must,  of  course,  be  kept 


CONSOLIDATION   BY  LEASE  a^c 

in  good  condition  during  the  tenure  of  the  lease.  The 
value  of  the  road  taken  over  may  or  may  not  be  entered 
upon  the  books  of  the  lessee,  but  it  is  advisable  to  enter 
the  equipment.  All  expenditures  for  extensions  or 
improvements  must  obviously  be  spread  over  the  life  of 
the  lease;  while  up-keep  and  operating  expenses  are  con- 
sidered as  current  charges.  The  guaranteed  6%  dividend 
of  $120,000  per  year  should  also  be  considered  a  charge 
against  operations. 

Leased  Equipment  of  Wilson  Transportation 

Company $ 

To    Wilson    Transportation    Company, 

Leased  Equipment $ 

For  equipment  taken  over  under  lease,  to 
be  returned  at  the  expiration  thereof 
(full  details). 

It  is  probable  that  rolling  stock  and  any  other  prop- 
erties of  the  lessee  company  used  in  the  operation  of  the 
railroad  property  will  be  transferred  to  the  leased  road, 
and  then  taken  back  at  the  expiration  of  the  lease. 

§  359.    Entries  for  Improvements  and  Note  Issue 

The  expenditures  for  improvements  on  leased  prop- 
erties should  be  charged  against  the  improvement 
accounts  of  the  respective  properties  in  order  to  keep 
the  different  expenditures  separate  and  distinct.  The 
security  back  of  the  note  issue  should  be  listed  separately 
in  the  explanation  of  the  journal  entry,  or  else  a  notation 
should  be  made  stating  the  disposition  of  the  collateral. 
Everything  must  be  so  recorded  as  to  be  clearly  under- 
stood. Interest  on  the  notes  and  the  amortization  of 
bond  discount  must  be  charged  each  year  as  operating 
expenses  of  the  business.  The  recording  entries  may  be  as 
follows : 


436  CORPORATE  COMBINATIONS 

Cash $475,000 

Bond  Discount 25,000 

To  Collateral  Serial  Notes $500,000 

For  sale  to  bankers  at  95  of  $500,000  of 
short  term  6%  notes,  payable  $100,000 
each  year  for  five  years,  secured  by  a 
deposit  with  the  trustee  of  $500,000  stock 
of  the  Lone  Ridge  Mines  Company. 

Pledged  Securities  for  Serial  Note  Issue $500,000 

To  Stocks  of  Other  Companies $500,000 

(Full  explanation  required  here.) 

Union  Mine  Improvements $100,000 

Wilson  Railway  Improvements 400,000 

To  Cash $500,000 

(Full  explanation  required  here.) 

§  360.    Adjusting  Entries  at  End  of  First  Year 

The  entries  which  follow  indicate  adjustments  at  the 
end  of  one  year  on  the  books  of  the  Vermont  Mining  and 
Smelting  Company.  Only  such  entries  are  shown  here  as 
aflfect  the  accounts  of  the  properties  leased;  interest  on 
bonds,  etc.,  being  omitted. 

December  31,  1916 

Union  Mine  Operating  Account $3,500.00 

Wilson  Railway  Operating  Account 14,000.00 

To  Union  Mine  Improvements $3,333-33 

"    Wilson  Railway  Improvements i3>333-33 

"    Bond  Discount 833.34 

To  write  off  1/30  of  improvements  and 
bond  discount  in  proportion  to  the  im- 
provements, 1/5  and  4/5,  as  follows: 

Improvements  cost $500,000 

Bond  discount 25,000 

Total $525,000 


CONSOLIDATION   BY   LEASE  437 

Union  Mine  Operating  Account $52,200 

To  Union  Mining  Company $52,200 

For  royalties  and  guaranteed  dividends  on 
leased  mine  for  1916,  as  per  terms  of 
lease,  being  10  cents  per  ton  on  122,000 
tons  ore  mined,  $12,200,  and  4%  dividend 
on  $1,000,000  of  capital  stock,  $40,000. 


Wilson  Railway  Operating  Account $120,000 

To  Wilson  Transportation  Company. . . .  $120,000 

For  application  of  guaranteed  6%  dividend 
on  company's  outstanding  stock  after  pay- 
ment of  taxes,  improvements,  operating 
repairs,  etc.,  according  to  the  terms  of  the 
lease.  6%  on  $2,000,000  capital  stock 
=  $120,000. 


Union  Mining  Company $52,200 

Wilson  Transportation  Company 120,000 

To  Cash $172,200 

For  payment  of  royalties  and  dividends  for 
leased  properties,  as  per  statement. 


Union  Mine  Operating  Account $29,300 

Wilson  Railway  Operating  Account 240,200 

To  Profit  and  Loss $269,500 

For  net  earnings  after  paying  royalties  and 
guaranteed  dividends  as  per  agreement. 

§  361.     Entries  for  Union  Mining  Company 

There  may  or  may  not  be  entries  made  on  the  books 
of  the  lessor  company  at  the  time  of  executing  the  lease. 
The  following  entries  are  suggestive,  though  a  different 
plan  might  be  followed.  Only  the  accounts  aflfected  by 
the  lease  are  included  in  the  entries,  no  attention  being 
given  to  accruals  or  intermediate  entries. 


438 


CORPORATE   COMBINATIONS 


Entry  when  lease  is  made: 

January  i,  1916 

Properties    Leased    to    Vermont    Mining    and 

Smelting  Company $438,500 

To  Mining  Property $400,000 

"    Buildings  and  Equipment 30,000 

"    Supplies  8,500 

For  lease  of  properties  to  Vermont  Mining 
and  Smelting  Company  as  per  terms  of 
the  lease  (full  explanation). 

Entries  at  end  of  first  year: 

December  31,  1916 

Cash $52,200 

To  Income  Account $52,200 

Income  from  mine  and  properties  leased  to 
Vermont  Mining  and  Smelting  Company, 
as  per  terms  of  the  lease : 
122,000  tons  of  ore  mined,  at  10 

cents  per  ton $12,200 

Guaranteed   dividend   on    capital 
stock    40,000 

Total  rental  for  year $52,200 


Income  Account $52,200 

To  Extinguishment  of  Mines  Reserve. .  $12,000 

"    Dividend  Account 25,000 

"    Profit  and  Loss 15,200 

For  disposition  of  income  from  leased  prop- 
erties. 

§  362.    Balance  Sheet  of  Union  Mining  Company 

The  balance  sheet  of  the  Union  Mining  Company  at 
the  end  of  the  first  year,  December  31,  1916,  would  appear 
as  follows: 


439 


CONSOLIDATION  BY  LEASE 

Union  Mining  Company 
Balance  Sheet,  December  31,  19 16 

(One  year  after  properties  were  leased  to  the  Vermont  Mining  and 
Smelting  Company) 


Assets 

Mines,   Buildings,   and 

Real  Estate $430,000.00 

Properties    Leased    to 

Vermont  Mining  and 

Smelting  Company..  438,500.00 
Supplies  and  Fixtures.  77,000.00 
Inventory    of    Ore    at 

Mines  and  Docks 254,600.00 

Accounts  Receivable,.     318,250.00 

Cash 377,520.00 

Prepaid  Charges 36,146.00 

Incorporation  Expenses, 

Balance 23,200.00 


$1,955,216.00 


Liabilities 

Mortgage  Payable $150,000.00 

Temporary  Bank  Loans     75,000.00 

Accounts  Payable 231,450.00 

Accrued  Pay-Roll 17,240.00 

Accrued    Charges   and 

Interest 26,385.00 

Reserve  for  Extin- 
guishment of  Mines.  12,000.00 

Reserves    for    Sundry 

Purposes   57,936.30 

Dividend  Account 25,000.00 

Capital  Stock  Out- 
standing    1,000,000.00 

Surplus 360,205.00 

$1,955,216.00 


Note:  Net  income  from  leased  properties,  $52,200,  applied  to  re- 
serve for  extinguishment  $12,000,  to  Dividend  account  $25,000,  and  to 
Surplus  $15,200. 

§  363.    Entries  for  Wilson  Transportation  Company 

Since  all  of  the  property,  road  bed,  and  equipment  of 
the  railway  has  been  leased  to  the  Vermont  Mining  and 
Smelting  Company,  it  is  apparent  that  no  separate  entries 
are  necessary  in  the  accounts  of  the  Wilson  Transportation 
Company.  The  property  accounts  stand  as  they  are  on  the 
books,  representing  as  they  do  the  investment  therein. 
At  the  end  of  the  year,  however,  entries  must  be  made  in 
the  books  to  record  the  dividends  guaranteed  by  the  Ver- 
mont Mining  and  Smelting  Company. 


440 


CORPORATE  COMBINATIONS 


December  31,  1916 

Cash    $120,000 

To  Income  Account $120,000 

Being  gfuaranteed  income  from  road  and 
equipment  leased  to  Vermont  Mining  and 
Smelting  Company,  as  per  terms  of  the 
lease. 

Income  Account $120,000 

To  Dividend  Account $120,000 

For  dividend  guaranteed  by  the  lessee,  Ver- 
mont Mining  and  Smelting  Company, 
payable  January  25,  19 17. 


CHAPTER    XXXI 

HOLDING    COMPANIES 

§  364.    Classification  of  Holding  Companies 

The  holding  company  is  a  corporation  formed  for  the 
purpose  of  purchasing  the  securities  of  other  corporations. 
It  furnishes  an  effective  method  for  the  consolidation  of 
various  companies  engaged  in  the  same  or  related  lines  of 
business,  and  the  elimination  of  competition. 

Holding  companies  may  be  divided  into  two  classes: 

1.  Those  organized  to  control  other  companies  in 

similar  or  associated  enterprises,  by  purchasing 
a  controlling  interest  in  the  stock  of  such 
companies. 

2.  Those  formed  to  invest  capital  in  the  securities 

of  other  companies,  though  not  necessarily  to 
the  extent  of  securing  control;  such  invest- 
ments may  be  spread  over  non-competitive 
lines  of  industry,  and  may  include  bonds  as 
well  as  stock. 

§  365*    Controlling  Corporations 

Where  the  state  laws  permit,  any  company  whose 
charter  so  provides,  may  purchase  the  stocks  and  bonds 
of  other  companies.  A  company  may  therefore  be  both 
an  operating  and  a  holding  company.  For  the  purpose 
of  securing  control  of  another  corporation,  it  is  customary 
to  purchase  at  least  51%  of  its  outstanding  stock  having 
voting  rights,  though  sometimes  a  much  smaller  propor- 

441 


442  CORPORATE   COMBINATIONS 

tion  may  be  sufificient  for  effective  control.  It  has  been 
stated  by  high  authority  that  33%  of  its  stock  is  sufficient 
to  control  almost  any  important  railway,  owing  to  the  wide 
distribution  of  the  securities  of  such  companies.  There  are 
many  instances  where  the  management  of  banks  and 
industrial  companies  has  been  maintained  by  a  unified 
minority. 

§  366.    Status  of  the  Subsidiary  Company 

The  sale  of  the  stock  of  a  company  to  a  holding  com- 
pany in  part,  or  even  in  whole,  does  not  necessarily  affect 
its  accounting,  save  as  to  the  record  of  stock  transferred. 
Nor  is  its  legal  status  changed  in  any  way,  though  it 
may,  as  a  matter  of  fact,  have  become  a  subsidiary  under 
the  control  of  the  holding  company.  The  most  notable 
example  of  holding  and  subsidiary  companies  is  perhaps 
found  in  the  case  of  the  United  States  Steel  Corporation 
which  is  not  an  operating  company.  All  dividends  de- 
clared by  the  constituent  or  operating  companies  are 
paid  to  their  own  stockholders;  and  the  holding  company, 
though  controlling  these  constituent  companies,  benefits 
by  such  dividends  only  as  a  stockholder  and  to  the  extent 
of  its  holdings  of  their  stock. 

§  367.    Legality  of  Holding  Companies 

Many  states  prohibit  the  organization  of  holding  com- 
panies, while  others  afford  especially  favorable  facilities 
for  their  formation,  A  holding  company  may  be  incor- 
porated in  a  state  which  permits  such  incorporation,  and 
then  lawfully  conduct  operations  through  its  constituent 
companies  within  states  prohibiting  its  existence.  The 
laws  of  Missouri,  for  instance,  prohibit  holding  companies, 
while  the  laws  of  New  Jersey  permit  them;  and,  as  a 
company  organized  in  one  state  may  by  comity  do  business 


HOLDING  COMPANIES  443 

in  another,  a  holding  company  organized  in  New  Jersey 
may  carry  on  operations  through  its  constituent  com- 
panies in  Missouri.  For  this  and  other  reasons  federal 
control  of  combinations  has  been  advocated. 

In  1890  Congress  passed  the  Sherman  Anti-Trust  Act, 
under  which  every  contract  or  combination  in  restraint 
of  trade  is  declared  illegal.  Under  its  provisions  some  of 
the  largest  combinations  have  already  been  dissolved.  By 
the  passage  of  the  Clayton  law  in  1914,  Congress  has 
undertaken  to  control  more  effectively  such  combinations 
as  come  within  federal  jurisdiction. 

§  368.    Accounting  Procedure  of  Holding  Company 

The  example  which  follows  shows  the  accounting 
procedure  involved  where  a  corporation  has  been  organized 
for  the  sole  purpose  of  purchasing  the  stocks  and  bonds 
of  other  companies. 

The  Harlow  Manufacturing  Company  was  incorporated 
July  I,  191 6,  for  the  purchase  of  stocks  and  bonds  of  other 
established  companies  as  a  means  of  providing  income  and 
of  harmonizing  conflicting  interests.  The  capital  stock 
is  $1,000,000,  composed  of  10,000  shares  of  the  par  value 
of  $100  each,  and  $950,000  of  this  capital  stock  has  been 
subscribed  and  paid  in.  Incorporating  expenses  amount 
to  $10,000.  The  proceeds  from  the  stock  subscriptions  have 
been  used  for  the  purchase  of  securities  as  of  July  i,  1916, 
as  follows : 

1.  $100,000  of  5%  first  mortgage  bonds  of  the  Vulcan  Iron 

Works  at  95  and  accrued  interest  for  three  months. ...     $96,250.00 

2.  $200,000  of  refunding  5%   first  mortgage  bonds  of  the 

Rapid  Transit  Corporation  at  98  and  accrued  interest 

for  three  months 198,500.00 

3.  2,000  shares   of  7%   cumulative  preferred   stock  of  the 

Long  worth  Steel  Company  at  105,  ex-dividend 2io,ooaoo 


444 


CORPORATE   COMBINATIONS 


4.  500  shares  of  6%  preferred  stock  of  the  Brownson  Trad- 

ing   Company   at   96   and    accrued    dividend    for    six 

months  due  this  day 49,500.00 

5.  3,000  shares  of  common  stock  of  the  Rockway  Iron  Min- 

ing Comi>any  at  par,  payable  one-half  down  and  the 

balance  in  three  months 300,000.00 

6.  1,000  shares  common  stock  of  the  Delaware  River  Power 

Company  in  exchange  for  a  similar  number  of  shares 

of  this  Company 100,000.00 


$954,250.00 


Dividends  and  interest  received  for  the  six-months 
period  ending  December  31,  19 16,  amount  to  $27,000;  bond 
interest  accrued  amounts  to  $3,750;  and  accrued  cumulative 
dividends,  to  $1,500.  The  operating  expenses  for  this 
period  aggregate  $2,800.  A  dividend  of  2%  on  the  com- 
pany's stock,  payable  January  15,  191 7,  is  declared  by  the 
directors  at  their  meeting  on  December  31,  1916.  All 
investments  are  to  be  carried  on  the  books  at  the  purchase 
price.  The  incorporating  expenses  are  to  be  written  off 
over  a  period  of  ten  years. 

§  369.     Accounting  Requirements 

The  entries  to  record  properly  the  transactions  of  this 
example  are  simple  and  need  not  be  set  out  in  full.  The 
procedure  and  book  records  required  at  the  time  of  in- 
corporation have  already  been  fully  explained.  When 
stocks  of  other  companies  are  purchased,  it  is  customary 
to  debit  them  at  the  cost  price  to  some  suitable  account, 
as  "Investments,"  "Stock  Investments,"  or  "Stocks  of 
Other  Companies."  A  like  procedure  is  followed  in  the 
purchase  of  bonds  of  other  companies,  substituting  the 
word  "Bond"  for  "Stock."     Sometimes  both  stocks  and 


HOLDING   COMPANIES 


445 


bonds  are  included  in  one  account,  but  when  this  is  done  a 
special  record  is  kept  to  show  the  details  of  the  various 
securities. 

Accrued  dividends  on  stock  investments  should,  if 
entered  at  all,  be  debited  to  "Accrued  Dividends"  account; 
and  likewise,  accrued  interest  on  bonds,  to  an  "Accrued 
Bond  Interest"  account.  The  income  from  such  invest- 
ments may  be  credited  to  a  general  "Income"  account,  or 
separately  to  suitable  accounts  which  distinguish  between 
stock  dividends  and  bond  interest. 

The  income  and  expenditures  and  the  resultant  assets 
and  liabilities  of  this  company  at  the  close  of  the  first 
half-year  are  reflected  in  the  accompanying  income  account 
and  balance  sheet: 

Harlow  Manufacturing  Company 
Income  Account 

For  Six  Months  Ended  December  31,  1916. 


Debits 

July  I,  1916 

Bond  Interest  Accrued. .  $3,750.00 

Dividends  Accrued 1,500.00 

Balance    (Income  for  Six 
Months)  27,000.00 


$32,250.00 


General  Expenses $2,800.00 

Incorporating    Expenses 

Written  Off 1,000.00 

Net  Income  for  Period.  23,200.00 


$27,000.00 


Credits 
December  31,  1916 
Preferred  Dividends  Re- 
ceived    $8,500.00 

Preferred  Dividends  Ac- 
crued       1,500.00 

Bond  Interest  Received.  7,500.00 
Bond  Interest  Accrued..  3,750.00 
Dividends    11,000.00 

$32,250.00 
Income  brought  down.  .$27,000.00 


$?7,ooo.oo 


Balance    $23^00.00 


446 


CORPORATE   COMBINATIONS 
Balance  Sheet,  December  31,  1916 

(End  of  first  six-month  period) 


Assets 

Liabilities 

Cash  on  Hand $9,950.00 

Capital  Stock: 

Investments : 

Authorized  $ 

1,000,000.00 

Bonds  of  Other  Com- 

Unissued   

50,000.00 

panies  291,000.00 

— 

Stocks   of  Other 

Outstanding  

$950,000.00 

Companies   658,000.00 

Dividend   No.    i   pay- 

Bond Interest  Accrued.      3,750.00 

able  January  15,  1917 

19,000.00 

Dividends    Accrued....       1,500.00 

Undivided  Profits. . . . 

4,200.00 

Incorporation  Expenses, 

Balance 9,000.00 

$973,200.00 

$973,200.00 

§  370.  Operating  Company  Purchasing  Controlling  Interest 

As  was  stated  above,  the  holding  company  is  usually 
created  for  the  sole  purpose  of  buying  the  stock  of  a  num- 
ber of  existing  corporations  and  thereby  to  exercise  control 
in  their  management.  This,  however,  is  not  always  the 
case. 

In  the  following  example  the  purchasing  company  is 
itself  actually  engaged  in  operating  its  plants,  but  by  the 
purchase  of  stock  it  secures  control  of  a  company  engaged 
in  producing  an  article  needed  by  it  in  the  manufacture 
of  railway  equipment. 

The  United  Equipment  Company  has  purchased 
$1,500,000  of  the  outstanding  stock  of  the  Nelson  Car 
Wheel  Company  at  105,  ex-dividend.  As  payment 
therefor  it  is  to  give  $1,000,000  of  its  unissued  common 
stock  at  125,  $150,000  of  its  unissued  preferred  stock  at 
1 10,  and  the  balance  in  cash.  The  financial  statement  of  the 
Nelson  Car  Wheel  Company  and  the  balance  sheet  of  the 
United  Equipment  Company  are  as  follows : 


HOLDING   COMPANIES 


447 


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448 


CORPORATE  COMBINATIONS 

United  Equipment  Company 
Balance  Sheet,  July  i,  191 6 


Assets 

Liabilities 

Property,  Plants,  and 

Capital    Stock — Pre- 

Elquipment    

$8,324,500.00 

ferred    

$4,000,000.00 

Inventories  of  Stock 

(Authorized  $5,000,000) 

and  Material 

3,240,800.00 

Capital  Stock — Com- 

Investments in  Stocks 

mon   

7.Q00.Q00.00 

and  Bonds  of  Other 

(Authorized  $10,000,000) 

Companies    

2,160,000.00 

First    Mortgage    5% 

Cash  on  Hand  and  in 

Twenty-Year 

Banks  

895,940.00 

Bonds,      Outstand- 

Accounts    Receivable 

2,560,300.00 

standing    

2,500,000.00 

Notes  and  Loans  Re- 

(Authorized $5,000,000) 

ceivable  

1,343,400.00 

Notes   and   Bank 
Loans  

Sinking  Fund  Deposit 

1,680,000.00 

with   Trustee 

326,900.00 

Accounts   Payable... 

1,740,300.00 

Other  Assets 

857,190.00 

Accrued  Interest, 

Taxes,    etc 

172,100.00 

Dividends   for  Half- 

Year,   Unpaid 

420,000.00 

Sundry   Reserves 

996,630.00 

Surplus  

1,200,000.00 

^ 

$19,709,030.00 

519,709,030.00 

The  points  of  interest  in  the  present  illustration  are: 

1.  The  entries  on  the  books  of  the  United  Equip- 

ment Company  for  the  purchase  of  stock. 

2.  The  entries  on   the   books   of   the   Nelson   Car 

Wheel  Company. 

3.  The  consolidated  balance  sheet  of  the  two  com- 

panies after  the  transfer  of  stock,  showing  the 
condition  of  the  United  Equipment  Company. 

The  entries  required  and  the  consolidated  balance  sheet 
of  the  two  companies  are  shown  on  the  following  pages. 


HOLDING   COMPANIES  449 

§  371.    Entries  on  Books  of  Purchasing  Company 

The  only  entries  on  the  books  of  the  United  Equip- 
ment Company  are  in  the  accounts  relating  to  capital, 
cash,  investments,  and  stock  premium;  the  accompanying 
entries  show  how  the  transaction  should  be  handled.  The 
premium  of  $75,000  on  stock  purchased  is  included  in  its 
cost  and  charged  to  Investments,  thus  reflecting  as  nearly 
as  possible  the  market  value  of  the  stock;  it  would  not 
be  wrong  to  charge  this  amount  against  the  Stock 
Premium  account  which  now  shows  a  credit  of  $265,000 
taken  upon  the  sale  of  the  company's  own  stock,  leaving 
a  balance  of  $190,000. 

First  Entry 

Investments  in  Subsidiary  Companies $1,575,000 

To  Stockholders  of  Nelson  Car  Wheel 

Company $i,57S»ooo 

For  purchase  of  15,000  shares,  par  value 
$1,500,000,  of  the  capital  stock  of  the 
Nelson  Car  Wheel  Company  at   105, 
to  be  paid  for  as  follows : 
10,000  shares  common  stock 

at   125 $1,250,000 

1,500  shares  preferred  stock 

at  1 10 165,000 

Cash  for  the  balance 160,000 

Total  investment $1,575,000 


Second  Entry 

Stockholders  of  Nelson  Car  Wheel  Company  $1415,000 

To  Capital  Stock— Common $1,000,000 

"    Capital   Stock— Preferred 150,000 

"    Premium  on  Stock  Sale 265,000 

For  issue  of  stock  to  the  vendors  of  the 
Nelson  Company  stock,  as  above. 


450 


CORPORATE  COMBINATIONS 


Third  Entry 

Stockholders  of  Nelson  Car  Wheel  Company     $160,000 

To  Cash $160,000 

For  settlement  of  balance  on  stock  pur- 
chased of  sundry  stockholders. 

As  a  result  of  the  above  entries,  the  cash  of  the  pur- 
chasing company  is  reduced  to  $735,940,  investments 
increased  to  $3,735,000,  outstanding  common  stock 
increased  to  $8,000,000,  outstanding  preferred  stock  in- 
creased to  $4,150,000,  and  stock  premium  credited  for 
$265,000.  All  other  items  in  the  balance  sheet  remain  as 
previously  stated.  New  certificates  of  stock  must  now  be 
issued  to  the  selling  stockholders  of  the  Nelson  Car  Wheel 
Company.  Suitable  entries  must  also  be  made  in  the 
official  records  of  the  company,  comprising  the  minute 
book,  stock  register,  and  stockholders  ledger. 

§  372.    Entries  on  Books  of  Selling  Company 

No  entries  for  the  sale  of  its  stock  are  required  on  the 
books  of  account  of  the  Nelson  Car  Wheel  Company.  The 
sale  was  a  personal  matter  with  the  stockholders  of  that 
company  and  one  in  which  no  official  action  is  required 
by  the  board  of  directors.  Any  necessary  entries  must,  of 
course,  be  made  in  the  transfer  book  and  stock  book,  and 
new  certificates  be  issued  in  exchange  for  those  cancelled. 

If  for  convenience  or  any  other  reason  the  transaction 
were  handled  as  a  company  matter,  the  entries  in  the 
general  ledger  might  be  as  follows : 

July  I,  1916 
Stock  Clearing  Account  (or  United  Equip- 
ment Company) $1,575,000 

To  Sundry  Stockholders $1,575,000 

For  sale  of  $1,500,000  stock  of  this  Com- 
pany by  sundry  stockholders  to  the 
United  Equipment  Company  at  105. 


HOLDING   COMPANIES  ^cj 

Stock  of  United  Equipment  Company $1,415,000 

Cash 160,000 

To     Stock     Clearing    Account     (or 

United  Equipment  Company) .  $1,575,000 

Stock  of  the  United  Equipment  Company, 
and    cash    received    in    exchange    for 
$1,500,000  of  stock  of  this  Company, 
as  above,  being  as  follows : 
10,000  shares  common  stock 

at   125 $1,250,000 

1,500  shares  preferred  stock 

at   no 165,000 

Cash  for  the  balance 160,000 

Sundry  Stockholders $1,575,000 

To  Stock  of  United  Equipment  Co..  $1,415,000 

Cash    160,000 

For  stock  received  as  above  and  cash 
turned  over  to  the  sundry  stockhold- 
ers, as  per  agreement. 

§  373-    The  Consolidated  Balance  Sheet 

The  consolidated  balance  sheet  shown  herewith  con- 
tains the  assets  and  liabilities  of  both  companies.  This 
plan  of  including  in  one  statement  the  items  of  a  main 
company  and  its  various  subsidiaries  is  now  in  general 
use  (Chapter  XXXII).  It  will  be  seen  that  the  combined 
balance  sheet  includes  only  the  two  stated  companies, 
while  the  United  Equipment  Company's  holdings  of  stock 
in  other  companies  are  shown  in  the  Invesl.Tients  account. 
It  is  obvious,  however,  that  this  account  would  not  include 
the  stock  of  companies  whose  statements  are  included  in 
the  consolidated  balance  sheet.  Even  the  bond  investment 
of  $250,000  might  be  deducted  from  the  Investments 
account  and  shown  separately  or  even  deducted  from  the 
outstanding  bonds;  but  for  the  purpose  of  illustration  it 
remains  in  the  present  consolidated  balance  sheet. 


452 


CORPORATE  COMBINATIONS 


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CORPORATE  COMBINATIONS 


§  374.    Parent  Companies 

A  useful  variant  of  the  holding  company  is  frequently 
employed  to  advantage  in  the  exploitation  of  inventions. 
A  parent  corporation  in  which  the  patent  rights  for  such 
inventions  are  vested,  is  formed  in  some  selected  state 
where  the  power  to  hold  the  stock  of  other  corporations 
is  legal.  Subordinate  companies  are  then  formed  in  the 
several  states  to  operate  in  specified  territorial  districts, 
and  to  these  companies  rights  in  the  inventions  are  as- 
signed' for  their  respective  districts,  the  parent  company 
usually  reserving  or  acquiring  a  controlling  interest  in 
each  subordinate  company.  The  patent  rights  may  be 
sold  outright  to  the  sub-companies,  or  leased  on  a  royalty 
basis;  or  perhaps  a  mere  license  may  be  issued.  The 
subordinate  company  then  operates  in  its  own  territory 
under  the  general  direction  of  the  parent  company. 

Under  this  plan  the  parent  corporation  makes  certain 
the  proper  fulfilment  of  its  contracts  with  the  subordinate 
companies,  and  also  insures  the  proper  harmonizing  con- 
duct of  general  business.*  A  well-known  example  is  that 
of  the  Packard  Motor  Car  Company;  its  various  sales 
branches  throughout  the  country  are  separately  incor- 
porated companies,  of  which  a  majority  interest  is  vested 
in  the  parent  company.  The  term  "parent"  is  frequently 
used,  however,  for  any  corporation  that  owns  or  controls 
underlying  companies. 

Each  investment  made  by  the  parent  company  in  an 
underlying  company's  stock  may  be  charged  to  "Invest- 
ments" account,  or  to  a  special  account  carrying  the  name 
of  the  particular  stock  purchased,  as  "Stock  of  Canadian 
Potato  Digger  Company."  Sales,  of  machines  may  be 
made  to  subordinate  companies  on  liberal  terms  of  credit, 


•For  a  discussion  of  this  subject,  see  People  v.  American  Bell  Telephone  Co., 
117  N.  Y.  241   (1889). 


HOLDING  COMPANIES 


455 


and  settlements  made  at  convenient  times  as  collections 
are  made  from  purchasers.  The  parent  company's  income 
is  derived  from  sales  to  subordinates,  from  royalties  re- 
ceived from  subordinates,  and  from  dividends  on  its 
investments  in  the  various  companies. 


CHAPTER    XXXII 

CONSOLIDATED    BALANCE    SHEETS 

§  375*    Purposes  of  Consolidated  Balance  Sheet 

A  consolidated  balance  sheet  is  one  that  includes  or 
combines  the  balance  sheets  of  several  different  concerns. 
Many  large  corporations  own  or  control  a  number  of  smaller 
companies,  and,  though  each  may  have  its  own  statement,  it 
is  frequently  necessary  or  desirable  to  present  all  the  finan- 
cial details  in  one  balance  sheet,  in  order  to  reflect  the 
financial  position  of  the  whole  group  of  affiliated  companies 
as  one  undertaking.  The  assets  and  liabilities  of  the  con- 
stituent companies  are  therefore  included  with  those  of  the 
controlling  company,  after  eliminating  therefrom  the  inter- 
company stocks,  bonds,  and  accounts  which  indicate  the 
relation  of  one  company  to  another.  Such  a  balance  sheet 
has  already  been  given  (§  373).  The  general  balance  sheet 
of  the  United  States  Steel  Corporation  is  an  excellent 
example  of  a  consolidated  statement,  combining  as  it  does 
the  statements  of  a  number  of  subsidiary  companies. 

§  376.    Contents  of  Consolidated  Balance  Sheet 

The  contents  of  a  consolidated  balance  sheet  are  prac- 
tically the  same  as  that  of  a  single  company.  There  are, 
however,  certain  points  peculiar  to  such  statements  which 
require  special  attention.     They  are  as  follows : 

I.  Intercompany  obligations — existing  debts  among  the 
constituent  companies  for  goods  sold,  for  advances  made 
to  one  another,  and  for  bond  interest  accrued,  or  declared 
dividends — ^being  offsetting  assets  and  liabilities,  are  usually 

456 


CONSOLIDATED  BALANCE  SHEETS       457 

eliminated  from  the  combined  statement,  though  they  are 
sometimes  included,  either  separately  or  with  other  current 
items. 

2.  Guarantees,  leases,  and  other  contracts  existing  be- 
tween the  parent  company  and  subsidiaries,  are  shown  in 
the  balance  sheet  among  the  assets  and  liabilities  or  as  foot- 
notes. The  frequent  exchange  of  collateral  between  the 
parent  and  subsidiaries,  for  accommodation  purposes,  or 
otherwise,  is  also  a  matter  of  importance. 

3.  The  extent  of  ownership  in  the  subsidiary  com- 
panies' stock — whether  the  parent  company  owns  all,  a 
controlling  interest,  or  only  a  portion  thereof — and  the 
extent  of  ownership  by  the  underlying  companies  in  the 
stock  of  the  parent  company  or  of  the  other  companies, 
should  be  clearly  stated,  either  in  the  balance  sheet  or  in  a 
supporting  schedule.  The  minority  interest  in  surplus 
profits  is  sometimes  indicated  also. 

4.  The  parent  company's  ownership  of  bonds  of  the 
subsidiary  companies,  and  vice  versa,  should  also  be  shown. 

§  377.    Preparation  of  Consolidated  Balance  Sheet 

The  manner  of  assembling  and  combining  the  items  of 
several  component  companies  into  a  consolidated  balance 
sheet  is  shown  in  the  following  example.  Three  companies, 
X,  Y,  and  Z,  are  used  in  the  illustration,  the  first  being 
purely  a  holding  company,  and  the  other  two,  subsidiary 
operating  companies.  Intercompany  stock  holdings  and 
current  obligations  that  require  careful  handling  are 
included. 

Form  A,  on  the  following  page,  shows  how  the  ac- 
countant or  corporation  official  gathers  details  and  makes 
deductions  on  his  "working  papers,"  "working  sheets,"  or 
"analysis  sheets,"  preparatory  to  his  final  exhibit.  The 
assets  and  liabilities  are  shown  separately  and  combined. 


458 


CORPORATE   COMBINATIONS 


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CONSOLIDATED  BALANCE  SHEETS       459 

The  eliminations  of  intercompany  items  in  arriving  at  the 
net  results  are  also  shown.  In  the  preparation  of  consoli- 
dated balance  sheets,  the  statements  of  the  several  companies 
are  prepared  separately  and  then  brought  together,  as  shown 
in  this  form. 

The  details  shown  in  the  columns  of  Form  A  are  used 
as  a  basis  for  illustrating  different  ways  of  making  up  con- 
solidated balance  sheets,  as  shown  in  Forms  B  and  C  of  the 
present  chapter.  In  the  process  of  reducing  the  various 
units  to  a  common  basis,  it  is  necessary  to  make  certain 
cancellations,  as  indicated  in  the  fifth  and  sixth  columns  of 
Form  A. 

§  378.  Consolidated  Balance  Sheet  with  Intercompany 
Details 

Form  B,  which  follows,  is  a  very  simple  example  of  a 
consolidated  balance  sheet,  including  all  of  the  items  of  the 
several  companies  without  any  cancellation  of  intercompany 
debits  and  credits.  The  items  are  arranged  very  much  as 
in  the  fourth  column  of  Form  A;  in  fact,  where  only  two 
or  three  companies  are  concerned  the  combined  information 
might  be  presented  in  a  columnar  exhibit  comprising  the 
first  four  columns  of  Form  A  as  they  stand. 

Among  the  assets  are  included  $60,000  of  advances  to 
subsidiary  companies  and  $27,000  of  intercompany  debts, 
the  latter  included  with  the  sundry  assets.  These  are  like- 
wise shown  as  offsetting  liabilities.  Taking  the  entire 
matter  as  one  concern,  it  will  be  seen  that  the  company 
owes  $87,000  to  itself.  The  third  form  omits  these  items 
entirely  but  refers  to  them  in  memoranda  or  footnotes. 
Accountants  sometimes  consolidate  only  the  accounts  of  the 
subsidiary  companies,  the  balance  sheet  of  the  holding 
company  being  presented  separately  in  the  ordinary  or 
unconsolidated  form. 


460  CORPORATE   COMBINATIONS 

Form  B 

Consolidated  General  Balance  Sheet 

Of  Company  X  and  Subsidiaries  Y  and  Z 

December  31,  1916 
(Presenting  all  accounts  and  intercompany  details  without  cancellations) 

Assets 

Plant  and  Capital  Assets $429,800.00 

Cash  and  Sundry  Assets 290,100.00 

Material,  Supplies,  and  Goods  in  Process 510,000.00 

Prepaid  and  Deferred  Charges 77,900.00 

Advances  to  Subsidiary  Companies 60,000.00 

Investments  in  Stocks  and  Bonds  of  Affiliated  Companies*  430,000.00 

Total  Assets $1,797,800.00 

Liabilities 

Capital  Stock  Outstanding: 

Of  Company  X $500,000.00 

Of  Company  Y • 300,000.00 

Of  Company  Z 200,000.00    $1,000,000.00 

Bonds  of  Company  Y 50,000.00 

Current   Liabilities 471,100.00 

Advances  and  Intercompany  Obligations 87,000.00 

Combined   Surplus   189,700.00 

Total  Liabilities $1,797,800.00 


§  379-    Consolidated  Balance  Sheet  without  Intercompany 
Details 

The  consolidated  balance  sheer  of  Form  C,  differs  from 
Form  B  only  in  so  far  as  intercompany  holdings  and  obliga- 
tions are  concerned,  which  are  indicated  in  such  a  way  as 
to  make  the  combined  statement  clear  and  easily  readable. 
In  reducing  the  various  units  to  a  common  basis,  the  re- 
quired cancellations  are  first  made  as  indicated  in  Form  A. 

*The  investments  may  be  stated  separately  if  desired. 


CONSOLIDATED  BALANCE  SHEETS 


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462  CORPORATE  COMBINATIONS 

Since  the  outside  or  minority  stockholders  of  Company 
Y  own  five-twelfths  of  the  capital  stock,  their  interest 
therein  and  in  the  surplus  profits  is  set  forth  separately. 
They  also  have  an  interest  in  the  surplus  of  Company  X 
which  might  be  shown.  If  one-twentieth  of  Company  X's 
surplus,  or  $4,060,  belongs  to  Company  Y,  then  the  minority 
interests  of  the  latter  company  own  five-twelfths  of  this 
surplus,  or  $1,691.67.  A  comparison  of  Forms  B  and  C 
will  show  the  slight  differences  in  arrangement,  indicating 
as  they  do  that  form  is  not  so  important  as  clearness  of 
expression  and  accuracy  of  results. 

§  380.    Additional  Illustrations  of  Consolidated  Balance 
Sheets 

The  balance  sheet  on  pages  464,  465,  is  that  of  a  manu- 
facturing company,  and  shows  an  arrangement  of  details 
slightly  different  from  those  of  Forms  B  and  C.  It  will  be 
noticed  that  the  company's  bonds  to  the  value  of  $50,000 
are  included  in  the  assets  and  also  in  the  liabilities,  this 
amount  being  owned  by  a  subsidiary.  The  stock  holdings 
are  indicated  as  a  memorandum  on  each  side,  while  the 
stock  premium  is  included  in  the  assets,  thus  indicating 
that  the  stock  owned  is  worth  more  than  par.  This  premium 
might  be  charged  against  surplus.  If  stock  is  purchased 
below  par,  the  discount  may  be  credited  to  surplus,  provided 
said  stock  is  really  worth  face  value.  A  deficit  of  an  under- 
lying company  should  be  shown  in  the  consolidated  balance 
sheet  as  a  deduction  from  surplus. 

The  division  of  surplus  profits  between  the  holding  com- 
pany and  outside  interests  must  obviously  depend  on  the 
status  of  the  preferred  stock.  The  holders  of  such  stock 
may  or  may  not  have  an  interest  in  excess  profits  over  and 
above  the  dividend  payments;  therefore  no  division  is 
attempted  in  this  exhibit. 


CONSOLIDATED  BALANCE  SHEETS      463 

Another  balance  sheet  is  given  on  pages  466,  467 :  that 
of  the  Minnesota  Lumber  Company  which  owns  and  oper- 
ates ten  retail  yards  and  four  subsidiary  companies.  In  this 
statement  the  separate  yards  and  underlying  details  are  con- 
tained in  supporting  schedules.  Each  schedule  assembles 
and  exhibits  all  of  the  items  of  a  similar  nature  on  hand 
at  the  various  yards  and  companies ;  Schedules  i  and  4  for 
cash  and  merchandise  are  cases  in  point.  For  example, 
Schedule  i  would  show  the  cash  and  book  balances,  or  over- 
drafts, at  the  various  yards  and  companies  as  well  as  at 
the  home  office.  Schedule  4  would  in  like  manner  show  the 
location  of  all  merchandise  inventories  and  supplies  of  the 
various  yards  and  companies.  Otherwise,  the  balance  sheet 
differs  but  slightly  from  the  other  forms  presented  in  this 
chapter.  By  placing  the  capital  and  surplus  profits  after 
the  liabilities  instead  of  before,  it  is  possible  to  show  the 
"net  worth"  of  the  combined  companies. 


464 


CORPORATE   COMBINATIONS 


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468 


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§  381.    Consolidated  Income  Account 

The  profit  and  loss  accounts  of  the  parent  company 
and  its  various  subsidiaries  may,  like  the  balance  sheets,  be 
combined  in  one  comprehensive  income  statement  or  profit 
and  loss  account.  This  is  a  much  simpler  process,  however, 
than  the  preparation  of  a  consolidated  balance  sheet,  since  it 
contains  no  intercompany  obligations  or  stock  and  bond 
holdings.  It  simply  groups  the  similar  items,  though  care 
must  be  exercised  to  see  that  profits  taken  on  sales  of 
materials  and  products  among  subsidiary  companies  are 
deducted,  especially  if  these  are  still  on  hand  and  included 
in  the  latter's  inventories.  A  columnar  working  sheet  is 
generally  used  in  combining  the  various  items  of  income 
and  expenditure,  as  already  illustrated  under  the  balance 
sheet. 


Part  VII — Reorganizations,  Receiverships,  and 
Dissolutions 


CHAPTER   XXXIII 

REORGANIZATION    BY    AGREEMENT 

§  382.    Definition  of  Reorganization 

*  A  reorganization  of  a  corporation  is  a  business  arrange- 
ment (i)  whereby  the  stocks  and  bonds  of  the  company 
are  rearranged  as  to  amount,  income,  or  priority,  or  (2) 
the  property  is  sold  to  a  new  corporation  for  new  stock  and 
bonds,  or  (3)  the  property  is  sold  by  foreclosure  of  a 
mortgage  upon  it,  and  the  purchaser  buys  for  himself  and 
such  of  the  old  stockholders  and  bondholders  as  he  as- 
sociates with  him."* 

§  383.    Methods  of  Reorganization 

According  to  the  definition  there  are  two  kinds  of  re- 
organization by  agreement.  The  first  is  a  mere  readjust- 
ment of  the  rights  of  the  various  parties  interested,  i.e.,  by 
the  stockholders  with  the  co-operation  of  the  bondholders 
or  other  creditors,  without  forming  a  new  corporation. 
The  problems  given  in  this  chapter  relate  to  such  readjust- 
ments. 

The  second  involves  the  formation  of  a  new  corporation 
and  the  voluntary  sale  of  all  the  property  of  the  old  cor- 
poration to  it  in  return  for  its  stocks  and  bonds.  The 
subject  of  consolidation  by  merger  and  by  purchase  has 


'Cook  on  Corporations,  {  883. 

469 


470 


REORGANIZATION 


been  treated  in  Chapter  XXIX,  and  the  accounting  prob- 
lems connected  with  this  method  of  reorganization  are 
essentially  similar. 

Both  of  these  methods  are  called  reorganizations  by 
agreement,  in  contradistinction  to  reorganizations  as  the 
result  of  legal  compulsion  where  the  corporation  is  insol- 
vent and  its  property  may  be  sold  to  pay  off  the  bondholders 
and  creditors. 

When  the  property  of  a  corporation  is  sold  under  fore- 
closure proceedings,  the  entity  of  the  corporation  does  not 
pass.  Whatever  organization  is  effected  by  the  purchaser 
to  operate  the  plant,  property,  or  business  taken  over,  is 
practically  a  new  organization  free  from  all  claim  or  lia- 
bility of  the  old  corporation.  The  accounting  problems 
relating  to  it  are  similar  to  the  problems  involved  in  opening 
the  records  of  a  new  corporation.  These  have  already  been 
treated  in  Chapters  XI,  XII,  XIII. 

A  later  chapter  will  deal  with  reorganization  as  the 
result  of  a  receivership. 

§  384.    Reorganization  by  Reduction  of  Stock 

A  reorganization  by  agreement  involving  some  readjust- 
ment of  the  stock  and  bonds  or  both,  usually  requires  the 
unanimous  consent  of  all  the  stockholders  if  it  is  a  stock 
readjustment,  or  of  all  the  bondholders  if  it  affects  their 
rights.  This  would  be  the  case  if  it  were  desired  to  increase 
or  decrease  the  stock  or  to  issue  preferred  stock.  If  the 
bondholders  accept  half  cash  and  half  a  new  issue  of  bonds 
for  their  existing  securities,  it  would  necessitate  a  readjust- 
ment of  this  kind. 

Such  a  readjustment  could  not  be  enforced  against  an 
objecting  stockholder  or  bondholder.  In  some  cases  it  is 
possible,  however,  for  those  holding  the  larger  interests  to 
buy  out  the  smaller  holders  who  are  likely  to  object,  if 


REORGANIZATION   BY   AGREEMENT  471 

they  are  not  too  numerous  or  too  unreasonable  in  their  terms. 
A  reorganization  by  agreement  is  a  comparatively 
simple  matter.  If  it  involves  an  increase  or  reduction  of 
capital  stock,  most  of  the  states  have  prescribed  procedure 
and  forms  for  amending  corporate  charters  that  are  neither 
costly  nor  complex.  At  common  law  no  charter  amend- 
ment was  possible  without  consent  of  the  legislature  and 
usually  of  all  the  stockholders,  but  under  modern  procedure 
most  amendments  may  be  made  by  a  majority  or  by  two- 
thirds  or  three- fourths  of  the  stockholders.  A  reduction 
of  capital  stock  is  not  as  simple  as  an  increase,  because  in 
reducing  stock,  the  rights  of  creditors  must  be  considered, 
and  the  surrender  of  outstanding  stock  and  the  issuance  of 
a  less  number  of  shares  involve  some  cancellation  and  re- 
issue of  stock  to  existing  stockholders.  Any  amendment  of 
the  charter  is  a  simple  matter  in  a  close  corporation  with 
few  stockholders.  In  most  of  the  states  any  desired  amend- 
ment may  be  had  by  consent,  notice  and  formal  procedure 
being  largely  waived. 

§  385.    Balance  Sheet  Before  Reduction  of  Capital  Stock 

As  an  illustration  of  the  procedure  and  book  records 
required  for  reducing  the  capital  stock  of  a  corporation,  the 
following  example  is  given : 

The  Swift  Automobile  Company  whose  statement  is 
given  below  was  formed  by  the  merger  of  sev^eral  automo- 
bile concerns.  At  the  time  of  the  combination,  good-will 
was  placed  at  $1,000,000  and  surplus  at  $340,000.  Since 
then  regular  dividends  of  7%  on  preferred  and  5%  on 
common  stock  have  been  paid,  excepting  the  one  recently 
declared  and  shown  among  the  liabilities.  An  audit  of  the 
books  made  for  the  year  ending  June  30,  19 16,  showed  that 
obsolete  properties,  doubtful  accounts,  and  valueless  invest- 
ments to  the  amount  of  approximately  $1,000,000  would 


472 


REORGANIZATION 


have  to  be  written  off.  The  following  statement  was  sub- 
mitted by  the  accountants  with  the  recommendation  that  the 
good-will  be  reduced  to  a  conservative  valuation : 

Swift  Automobile  Company  and  Branches 
Balance  Sheet,  June  30,  1916 

(Before  Reduction  of  Capital) 


Assets 

Liabilities 

Cost    of    Properties 

Capital  Stock: 

and   Equipment, 

Preferred   ....... 

$1,000,000.00 

including  Good- 

Common  

3,000,000.00 

Will  

Securities    Owned, 

$4,500,000.00 

Total   

$4,000,000.00 

of  Subsidiary  and 

Bonds  Outstanding. 

2,500,000.00 

Other  Companies. 

1,300,000.00 

Short  Term  Notes. 

500,000.00 

Sinking    Fund    De- 

Accounts  Payable. . 

1,525,900.00 

posit  

220,000.00 

Notes  Payable 

490,000.00 

Cash  

235,000.00 

Accrued  Items 

31,200.00 

Accounts  Receivable 

1,172,300.00 

Bond  Interest,  pay- 

Bills and  Notes  Re- 

able July  I,  1916. 

62,500.00 

ceivable  

520,000.00 

Dividend     Declared 

Material  Supplies 

and  Unpaid 

120.000.00 

and     Finished 

Sundry  Reserves... 

189,000.00 

Parts 

981,600.00 

Contract    Work    in 

Total   

$9,418,600.00 

Course    of     Con- 

Indorsement    on 

struction   

476,300.00 

Notes   Discounted 

Accrued    and    Pre- 

(per  contra) 

850,000.00 

paid  Items 

58400.00 

Balance,   Profit  and 

Loss   Surplus 

45,000.00 

Total  Assets 

$9,463,600.00 

Notes   Discounted 

(per  contra) 

850,000.00 

$10,313,600.00 

$10,313,600.00 

§  386.    Accounting  Requirements 

Following  the  suggestion  of  the  accountants,  the  stock- 
holders in  a  special  meeting  called  for  the  purpose,  decided 


REORGANIZATION   BY   AGREEMENT  473 

to  write  off  the  entire  $1,000,000  of  good-will  and  to  add 
$500,000  to  the  surplus  by  a  reduction  of  the  capital  stock. 
The  common  stock,  therefore,  is  to  be  reduced  to  $1,500,- 
000,  while  the  cumulative  preferred  stock  is  to  remain  as 
before,  and  $500,000  is  to  be  added  to  the  surplus  account. 

(a)  State  the  procedure  required  to  bring  about  these 
changes. 

(b)  Give  the  book  entries  required  to  adjust  the  ac- 
counts in  accordance  with  the  resolutions  of  the  directors 
and  stockholders. 

§  387.  (a)  Procedure 

The  reduction  of  capital  stock  requires  a  charter  amend- 
ment, which  must  be  obtained  from  the  state  originally 
granting  the  charter  and  will  require  the  aid  of  a  lawyer. 
Prescribed  procedure  must  be  closely  followed. 

§  388.    (b)  Entries  and  Records 

Complete  official  minutes  of  the  proceedings,  resolutions, 
etc.,  must  be  kept  in  the  minute  books  of  both  the  directors 
and  stockholders.  All  certificates  of  stock  must  be  turned 
back  to  the  company  and  interim  receipts  taken  therefor 
pending  the  issue  of  new  certificates.  Sometimes  a  trustee 
is  appointed  for  this  purpose  in  case  the  company  does  not 
already  have  a  regular  fiscal  agent  or  registrar  upon  whom 
this  duty  would  devolve.  The  new  common  stock  cer- 
tificates when  issued  will  be  for  one-half  the  number  of 
shares  cancelled,  so  that  each  holder  thereof  will  own  50% 
of  his  former  holdings.  This  does  not  mean,  however,  that 
the  company's  actual  net  worth  is  less  than  under  the  former 
arrangement,  nor  that  the  holder  of  stock  has  lost  anything 
by  the  charter  amendment.  His  shares,  while  formerly 
valued  below  par,  are  now  considerably  above.  The  net 
worth  of  the  company  (capital  and  surplus)  is  now  $3,045»" 


474 


REORGANIZATION 


ooo,  so  that  each  of  the  15,000  shares  of  common  stock 
has  a  book  (or  intrinsic)  value  of  $136.33  per  share.  The 
book  value  of  the  preferred  stock  remains  as  before  at  $100 
per  share. 

Each  stockholder's  account  in  the  stock  ledger  should 
be  debited  with  the  number  of  shares  cancelled,  and  new 
certificates  of  stock  reissued  for  the  balance.  Another  plan 
is  to  debit  each  account  for  the  entire  number  of  former 
shares  in  order  to  close  the  account,  after  which  the  account 
is  credited  with  the  actual  number  of  new  shares  issued. 

The  only  entry  required  to  be  made  in  the  general  ledger 
is  one  to  adjust  the  Capital  Stock,  Surplus,  and  Good-Will 
accounts,  as  follows : 

July  I,  1916 

Capital   Stock — Common $1,500,000 

To  Good- Will  (or  Plant) $1,000,000 

"    Surplus 500,000 

To  record  the  requirements  of  a  charter 
amendment  granted  this  day,  reducing 
the  number  of  shares  of  common  stock 
from  30,000  to  15,000  of  the  par  value 
of  $1,500,000. 

This  entry  also  cancels  the  entire  Good-Will  account 
and  creates  an  additional  surplus  of  $500,000. 

If  it  is  desired  to  cancel  the  old  capital  stock  account 
and  to  open  a  new  account  for  the  reduced  capital  stock, 
the  following  plan  might  be  adopted : 

Capital  Stock — Common $3,000,000 

To  Capital  Stock — Common $1,500,000 

"    Good-Will    1,000,000 

"    Surplus  500,000 

(Full  explanation  necessary  here.) 

Other  methods  of  stating  the  journal  entry  might  be 
used,  keeping  in  mind  that  accounts  should  be  given  such 


REORGANIZATION   BY   AGREEMENT  475 

titles  as  will  readily  identify  their  functions.  Referring  to 
the  balance  sheet,  notice  the  manner  of  stating  the  notes 
under  discount  at  the  bank.  This  plan  is  used  by  some 
accountants.  A  new  balance  sheet  does  not  need  to  be 
shown  at  this  time  since  only  three  accounts  are  affected 
by  the  adjustment.     They  are: 

Common  Stock  reduced  from  $3,000,000  to  $1,500,000. 
Good-Will  reduced  from  $1,000,000  to  nothing. 
Surplus  increased  from  $45,000  to  $545,000. 

§  389.    Conditions  of  Reorganization 

This  company,  like  many  others,  has  overvalued  its 
properties  and  has  issued  its  capital  stock  on  the  strength 
of  such  valuation.  The  properties  and  good-will  are  listed 
at  "cost,"  that  is,  after  allowing  for  depreciation;  but  this 
only  indicates  the  value  placed  upon  them  at  the  time  of 
purchase,  measured  in  shares  of  the  purchasing  company, 
which  evidently  was  too  high.  Stock,  like  water,  must  find 
its  level  sooner  or  later,  and  it  is  well  known  that  the  stock 
market  quotations  usually  show  it  very  close  to  its  intrinsic 
property  valuation  after  all  water  or  fictitious  value  has 
been  eliminated. 

Assuming  that  the  good-will  of  $1,000,000  was  largely 
fictitious,  it  is  apparent  that  the  intrinsic  value  of  the  stock 
was  only  $3,000,000,  or  $75  per  share;  if  the  good-will  was 
represented  by  common  stock,  then  the  market  value  of 
the  common  stock  will  be  reduced  by  one-third,  or  to 
$66.67  P^'*  share,  while  the  preferred  stock  will  remain  at 
or  near  the  par  value.  By  reducing  the  capital  stock  to 
$2,500,000,  the  good-will  is  eliminated  and  $500,000  added 
to  the  Surplus  account,  with  the  result  that  the  actual  capi- 
tal and  surplus  is  then  $3,045,000,  and  the  intrinsic  value 
of  all  stock  averages  slightly  over  $120  per  share.  The 
relative  value  of  preferred  and  common  stock  must,  of 


476 


REORGANIZATION 


course,  depend  upon  the  status  of  the  preferred;  if  the 
latter  is  entitled  to  only  par  value,  $1,000,000  on  liquida- 
tion, it  is  obvious  that  the  15,000  shares  of  common  stock 
must  be  worth  $2,045,000  or  about  $136  per  share,  and  the 
preferred  slightly  above  par  in  harmony  with  its  annual 
earnings.  It  will  be  seen  that  the  stock  reduction  and 
elimination  of  good-will  do  not  enhance  the  financial  sta- 
bility of  the  company  upon  which  its  credit  is  based.  On 
the  other  hand,  the  status  of  the  preferred  and  common 
stockholders  remain  the  same  as  to  proprietorship  and 
participation  in  profits.  The  preferred  stock  will,  if  busi- 
ness permits,  pay  its  7%  dividend  or  $70,000  per  year, 
while  the  remaining  profits  will  be  available  for  the  common 
stock  dividend. 

The  American  Milling  Company  in  1914  reduced  its 
capital  stock  from  $3,500,000  to  $700,000,  by  the  elimina- 
tion of  good-will  and  patents.  In  a  letter  sent  to  the 
stockholders  asking  them  to  vote  on  the  proposed  reduction, 
the  following  paragraph  appeared  : 

"The  gooa-wui  and  patent  rights  add  nothing  to  a  soHd  financial 
basis  on  which  to  operate  your  property  and  a  statement  containing 
items  of  this  character  injures  us  in  banking  circles  to  such  an  extent 
that  your  officers  are  handicapped  in  making  a  proper  financial  show- 
ing, and  in  addition  to  this  we  are  compelled  to  pay  $2,800  capital 
stock  tax  per  annum  on  this  excess  which  would  be  saved  to  you  by 
making  the  change." 

§  390.    Balance  Sheet  Before  Adjustment 

To  illustrate  the  reorganization  of  a  company  to  avoid 
the  appointment  of  a  receiver,  the  case  of  the  Booth  Manu- 
facturing Company  may  be  taken.  The  stock  of  this 
company  was  in  the  hands  of  fifty  stockholders,  five  persons 
held  60%  of  it  and  voted  themselves  into  office  from  year 
to  year.  These  five  officials  paid  themselves  high  salaries 
and  even  permitted  the  capital  to  become  greatly  impaired 


REORGANIZATION    BY    AGREEMENT  477 

through  extravagance  and  apparent  incompetence.  The 
minority  stockholders  made  apphcation  to  the  court  for 
the  appointment  of  a  receiver,  on  the  grounds  that  they 
had  been  treated  unfairly  and  that  the  interests  of  the  com- 
pany were  being  sacrificed  for  personal  advantage  of  the 
majority  stockholders.  The  following  statement  (the  case 
is  entirely  fictitious)  was  submitted  at  the  court's  request: 


Booth  Manufacturing  Company 
Balance  Sheet,  June  i,  1916 

(Before  Adjustment) 


Assets 

Real  Estate $20,000.00 

Machinery  and  Tools.  12,000.00 
Furniture    and    F  i  x  - 

tures   5,000.00 

Good-Will  25,000.00 

Material  and  Stock  on 

Hand  46,800.00 

Notes      Receivable 

($2,000  overdue).*..  27,500.00 
Accounts  Receivable 

($6,000  doubtful)  . . .  36,200.00 

Cash  in  Bank 5,900.00 

Profit  and  Loss 4,300.00 

$182,700.00 


Liabilities 
Capital   Stock   (shares 

$10  each) $100,000.00 

Mortgage  Outstanding       15,000.00 
Bank  Loans,  Indorsed 

by  Directors 10,000.00 

Notes  Payable 25,000.00 

Accounts  Payable 32,700.00 


$182,700.00 


§  391.    Plan  of  Adjustment  Adopted 

In  resisting  the  application  for  receivership,  the  directors 
agreed  to  a  change  in  the  policy  and  management  of  the 
company.  This  was  accepted  by  the  minority  interests, 
thereby  obviating  the  necessity  for  a  receivership.  The 
agreement  included  the  following  points : 


•$8,000  of  additional  customers'  notes  have  been  discounted  at  the  bank  and 
bear  the  Company's  indorsement,  one  of  which  for  $2,000  made  by  Ihompson 
Brothers  has  not  been  paid  and  must  be  taken  up  by  this  Company. 


478 


REORGANIZATION 


1.  Cumulative  voting  is  to  be  authorized  so  that  the 
minority  stockholders  will  elect  two  of  the  five  directors. 

2.  Salaries  are  to  be  paid  only  to  persons  actually  en- 
gaged in  the  company's  work  and  are  to  be  determined  by 
the  unanimous  vote  of  all  the  directors. 

3.  A  campaign  of  business  building  is  to  be  inaugurated 
to  make  the  company  prosper  as  in  previous  years. 

4.  No  merchandise  is  to  be  purchased  until  the  present 
supply  is  considerably  lessened. 

5.  Efforts  are  to  be  made  to  enforce  prompt  payment  of 
notes  and  accounts  receivable. 

6.  An  assessment  of  12%,  payable  forthwith,  is  to  be 
levied  on  all  stock,  in  exchange  for  which  certificates  of  in- 
debtedness, payable  in  six  months  without  interest,  are  to  be 
issued. 

7.  The  indorsed  bank  loans  are  to  be  paid  off  and  the 
personal  liability  cancelled. 

8.  Annual  audits  by  certified  public  accountants  are  to 
be  made  hereafter. 

§  392.    Accounting  Requirements 

In  carrying  out  these  requirements  and  adjustments,  the 
following  book  entries  are  required,  assuming  that  $15,000 
of  the  stock  has  been  disposed  of  at  a  profit  of  $2,800 ;  that 
$6,000  of  the  overdue  notes  receivable  have  been  paid  and 
the  remainder  renewed,  and  that  $13,500  of  accounts  re- 
ceivable have  been  collected : 

June  I,  1916 
First  Entry 

Cash $12,000 

To  Certificates  of  Indebtedness $12,000 

For  advances  made  by  the  stockholders,  being 
a  12%  assessment  on  outstanding  stock,  and 


REORGANIZATION   BY   AGREEMENT  475 

represented  by  certificates  of  indebtedness 
payable  December  i,  without  interest,  as 
per  special  agreement. 

Second  Entry 

Bank   Loans $ic,ooo 

To  Cash $10,000 

For  payment  of  indorsed  notes  at  First  Na- 
tional Bank,  under  reorganization  agreement. 

Third  Entry 

Cash  $17,800 

To  Merchandise   $15,000 

"    Profit  and  Loss 2^00 

For  special  sale  of  part  of  the  finished  stock 
at  a  profit  of  $2,800. 

Fourth  Entry 

Cash $19,500 

To  Notes   Receivable $6,000 

"    Accounts   Receivable 13,500 

For  payment  on  account  of  notes  and  accounts 
receivable. 

Fifth  Entry 

Notes   Receivable $6,000 

To  Notes  Receivable $6,000 

For    renewal    of    overdue    notes    by    sundry 
customers. 

Sixth  Entry 

Thompson  Brothers  (protested  note) $2,000 

To  Cash $2,000 

For  payment  of  their  dishonored  note  due  to- 
day at  the  bank. 

The  revised  balance  sheet  after  these  entries  have  been 
made  is  as  follows : 


48o 


REORGANIZATION 


Booth  Manufacturing  Company 
Balance  Sheet,  June  i,  1916 

(After  Adjustment) 


Assets 

Real  Estate $20,000.00 

Machinery  and  Tools.  12,000.00 

Furniture  and  Fix- 
tures     5,000.00 

Good-Will  25,000.00 

Material  and  Stock  on 

Hand   31,800.00 

Notes   Receivable 21,500.00 

Thompson     Brothers 

(protested   note) 2,000.00 

Accounts  Receivable..  22,700.00 

Cash  in  Bank 43,200.00 

Profit  and  Loss i  ,500.00 

$184,700.00 


Liabilities 

Capital   Stock $100,000.00 

Mortgages  Outstand- 
ing         15,000.00 

Certificates  of  Indebt- 
edness           12,000.00 

Notes    Payable 25,000.00 

Accounts   Payable 32,700.00 


$184,700.00 


CHAPTER    XXXIV 
RECEIVERSHIP 

§  393*    Receivers 

A  receiver  is  an  officer  of  the  court,  appointed  in  an 
equitable  action,  to  take  charge,  custody,  control,  and 
management  of  a  plant,  property,  or  business,  to  hold  and 
operate  or  sell  out  to  the  best  advantage. 

The  receiver  represents  the  court,  and  is  subject  to  its 
order  alone,  and  any  interference  with  the  lawful  acts  of 
the  receiver  is  contempt  of  court.  His  control  is  complete, 
and  neither  directors,  stockholders,  nor  creditors  have  any 
voice  in  the  management  while  the  receiver  is  in  charge. 

Of  late  years  the  use  of  receivers  in  those  cases  where 
corporations  have  become  involved  in  financial  difficulties 
has  largely  increased.  Especially  in  the  case  of  railroads 
and  the  larger  industrial  corporations,  where  the  enter- 
prise must  be  continued,  has  the  use  of  the  receiver  become 
the  regular  course.  The  law  relating  to  the  appointment 
and  procedure  of  receivers  has  become  extensive  and  only 
a  few  of  its  more  prominent  features  can  be  mentioned  here. 

§  394.    Appointment  of  Receivers 

A  receiver  may  be  appointed  by  a  court  of  equity  at  the 
suit  of  creditors  having  a  lien,  a  mortgage,  or  judgment 
where  there  is  eminent  danger  of  the  property  being  lost, 
wasted,  or  misapplied.  A  receiver  may  be  appointed  before 
foreclosure,  in  an  action  to  foreclose  a  mortgage,  if  neces- 
sary to  prevent  loss,  waste,  or  depreciation. 

In  extreme  cases  of  fraud  and  mismanagement  on  the 

481 


482  RECEIVERSHIP 

part  of  the  officers  of  the  corporation,  a  court  of  equity  will 
appoint  a  receiver  at  the  suit  of  minority  stockholders. 

In  most  of  the  more  advanced  states,  in  addition  to  the 
usual  powers  of  the  court  of  equity  to  appoint  receivers, 
the  statutes  provide  for  their  appointment  in  certain  specified 
cases.  For  example,  in  New  York  the  statutes  provide  that 
a  receiver  may  be  appointed  in  cases  of  foreclosure  of  a 
mortgage  when  the  income  has  been  mortgaged  or  when 
a  property  is  insufficient  to  pay  the  mortgage  debt;  also 
the  statutes  authorize  receiverships  in  various  dissolution 
proceedings. 

Usually  a  receiver  is  appointed  on  the  application  of  a 
mortgagee  or  of  a  trustee  of  the  mortgage  deed  or  trust 
in  connection  with  the  foreclosure  proceedings.  Where  the 
mortgage  covers  income,  rents,  and  profits  and  the  cor- 
poration is  insolvent,  the  appointment  of  the  receiver  is  a 
matter  of  course.  Usually  it  is  to  the  interest  of  all  con- 
cerned that  the  receiver  should  be  appointed.  Where  there 
is  any  prospect  of  a  reorganization,  such  an  appointment 
is  absolutely  necessary. 

Usually,  in  a  foreclosure  suit  the  court  will  not  appoint 
an  officer,  director,  or  stockholder  of  the  corporation  as  re- 
ceiver, nor  any  one  interested  on  the  other  side,  unless  by 
agreement  of  both  sides.  A  trust  company  may  be  ap- 
pointed. The  appointment  of  a  receiver  rests  in  the  dis- 
cretion of  the  court.  To  handle  to  the  best  advantage  the 
affairs  of  a  financially  embarrassed  corporation  requires  the 
highest  order  of  business  ability  and  judgment,  and  it  is 
not  always  possible  to  find  such  men  free  when  they  are 
needed  to  take  receiverships. 

§  395*    Powers  of  Receivers 

From  the  date  of  his  appointment  the  receiver  takes 
title  to  the  personal  property  of  the  corporation.     Real 


RECEIVERSHIP 


483 


estate  must  be  conveyed  to  him  by  an  actual  deed  unless, 
as  in  New  York,  the  statutes  provide  that  real  estate  as  well 
as  personal  property  passes  to  the  receiver  on  his  appoint- 
ment. After  a  receiver  is  appointed,  the  officers  of  the 
corporation  have  no  more  authority  to  do  anything  in  regard 
to  the  corporation  business ;  neither  can  creditors  levy  execu- 
tion, attachment,  or  other  legal  process  on  its  property. 
What  is  said  here  applies  only  to  property  within  the  state. 
If  there  is  property  in  another  state,  it  will  be  necessary 
for  the  courts  of  that  state  to  appoint  a  receiver  to  take 
it  over. 

With  the  permission  of  the  court  appointing  him,  the 
receiver  may  institute  suit  almost  to  the  same  extent  as  the 
corporation  he  represents,  but  no  one  can  bring  suit  against 
the  receiver  without  the  permission  of  the  court.  He 
represents  the  corporation,  stockholders,  and  creditors.  In 
the  case  of  an  uncertain  or  doubtful  claim,  he  may  com- 
promise it.  He  may  sell  all  the  assets  to  a  new  corporation 
even  where  some  of  the  stockholders  dissent.  This  power 
enables  him  to  promote  an  effective  reorganization. 

A  receiver  cannot  undertake  new  work  or  extend  the 
operations  of  the  corporation  unless  he  has  express  authority 
from  the  court  that  appointed  him.  All  that  pertains  to  the 
usual  management  and  operations  of  the  corporation  he 
may  do  under  his  general  authority,  and  the  court  will 
sustain  him  unless  his  acts  are  clearly  reckless  or  fraudulent. 
The  books  of  the  corporation  are  usually  placed  in  his  hands 
and  are  subject  to  the  inspection  of  the  parties  interested. 

Any  special  authority  required  to  preserve  the  property 
or  to  save  the  rights  of  creditors  or  stockholders  will  be 
granted  by  the  court  on  application ;  for  instance,  a  receiver 
may  be  authorized  to  borrow  money  to  pay  pressing  claims 
or  to  pay  interest  on  coupons  due  on  an  underlying  mort- 
gage, or  to  buy  new  machinery,  or  to  buy  rails  and  rolling 


484 


RECEIVERSHIP 


Stock.  For  such  purposes  the  receiver  has  a  right  to  use 
the  income  of  the  corporation  as  it  comes  into  his  possession, 
and  when  this  is  insufficient  he  may  ask  the  court  for 
authority  to  issue  receiver's  certificates.  These  are  evidences 
of  debt  issued  by  the  receiver  and  take  precedence  of  any 
existing  debts  and  liens. 

The  receiver  may  take  over  existing  leases  and  contracts 
or  he  may  decline  to  continue  them.  If  he  continues  existing 
contracts,  then  sums  becoming  due  on  them  thereafter,  are 
preferred  claims,  being  part  of  the  receiver's  own  expenses 
of  operation.  Amounts  previously  due  on  them  and  all 
claims  on  rejected  leases,  notes,  and  contracts  have  to 
take  their  chance  with  the  claims  of  the  general  creditors. 
The  receiver's  authority  to  refuse  to  carry  out  executory 
contracts  of  the  corporation  is  undoubted,  and  he  has  a 
reasonable  time  to  decide  as  to  whether  he  will  adopt  or 
discontinue  such  contracts. 

The  receiver  will  apply  the  income  first  to  the  payment 
of  wages,  repairs,  and  expenses  of  operation.  Until  these 
are  paid,  the  bondholders  take  nothing. 

§  396.    Liability  of  Receivers 

In  some  cases  receivers  have  managed  so  badly  that  on 
final  accounting  the  expenses  of  the  receivership  have  con- 
sumed the  entire  property,  leaving  nothing  for  the  creditors. 
The  discretion  of  the  court  was  at  fault,  and  in  such  cases 
there  is  no  redress.  The  receiver  is  not  liable  for  any  debts 
or  obligations  incurred  by  him  in  the  discharge  of  his  trust, 
unless  he  has  been  guilty  of  misconduct.  He  is  not  liable 
for  lack  of  business  ability. 

If  he  acts  in  important  matters  without  express  authority 
from  the  court,  he  may  make  himself  liable  personally.  In 
a  case  in  Pennsylvania  where  the  receivers  were  authorized 
to  continue  business  for  six  months  and  they  went  on  for 


RECEIVERSHIP 


485 


six  months  longer,  the  court  held  them  responsible  for  the 
losses  of  the  last  six  months. 

A  receiver  is  allowed  reasonable  compensation  and  his 
counsel  fees.  In  cases  where  the  amount  involved  is  not 
large,  5%  on  receipts  and  also  on  disbursements  is  usually 
allowed.  The  court  will  always  be  governed  by  the  char- 
acter of  the  work.  The  skill  shown  should  be  a  factor  in 
determining  the  amount  of  compensation. 

§  397.    Receivers  in  Bankruptcy  Cases 

A  court  of  bankruptcy  may  appoint  a  receiver  to  take 
charge  of  the  bankrupt's  property  when  it  is  necessary  for 
the  preservation  of  the  bankrupt's  estate,  pending  the  ap- 
pointment of  the  trustee;  otherwise  the  property  might  be 
wasted  and  depreciated.  A  receiver  in  bankruptcy  has 
limited  powers  and  his  tenure  is  temporary.  It  is  expected 
that  the  trustee  will  wind  up  the  estate,  and  hence  the 
receivership  is  merely  a  preliminary  to  his  appointment. 

The  matter  of  dissolution  by  bankruptcy  is  treated  in 
Chapter  XXXVII. 

§  398.    The  Receiver's  Accounts 

A  receiver  is  required  to  keep  careful  record  of  his 
transactions  and  to  render  frequent  accounts  during  his 
receivership.  To  save  the  time  of  the  court,  it  is  usual  to 
give  immediate  charge  to  a  master  in  chancery  who  has 
authority  to  pass  on  the  accounts  submitted.  His  decision 
is  final  unless  an  appeal  is  taken  to  the  court.  Unless  the 
items  allowed  are  unusual,  the  decisions  of  the  master  will 
be  sustained.  If  the  master  approves  the  accounts  as  ren- 
dered from  time  to  time,  the  court  will  rarely  fail  to  sustain 
him. 

There  being  no  prescribed  form  of  keeping  the  receiver's 
accounts,  the  accountant  may  use  his  own  judgment  in  out- 


486  RECEIVERSHIP 

lining  the  books  to  be  used  or  the  manner  of  keeping  them. 
The  availability  of  data  pertaining  to  the  trust  is  the  main 
consideration,  however,  and  should  be  so  regarded  in  plan- 
ning the  records.  No  matter  what  method  of  account- 
keeping  is  used,  the  receiver  is  required  to  state  the  assets 
and  liabilities  of  the  company  at  the  beginning  and  termina- 
tion of  his  receivership,  as  well  as  the  various  intervening 
transactions.  These  statements  to  the  court  become  public 
records  and  are  available  for  general  inspection.  It  may  be 
said  that  these  suggestions  apply  also  to  the  account-keeping 
for  assignees,  trustees,  executors,  and  administrators. 

§  399'     The  Company's  Accounts  During  Receivership 

The  general  books  of  an  embarrassed  company  may  be 
adjusted  to  meet  the  new  condition  of  affairs,  but  in  most 
cases  they  are  continued  as  usual  until  it  is  known  what  is 
to  become  of  the  company.  If  they  are  to  be  kept  in 
harmony  with  the  accounts  of  the  receiver,  adjusting  entries 
may  be  made  and  all  ledger  accounts  closed,  except  Capital 
Stock,  Receiver,  and  Deficiency  or  Surplus.  The  debit 
balance  to  the  receiver's  account  will  stand  until  the  end  of 
the  receivership.     (For  adjusting  entries,  see  §  411.) 

Upon  termination  of  the  receivership,  when  the  assets 
and  liabilities  as  then  existing  are  turned  back  to  the 
company,  assuming  that  business  is  to  be  continued,  entries 
must  be  made  debiting  assets  and  crediting  the  liabilities, 
the  difference  being  credited  to  the  receiver's  account.  The 
receiver's  balance  (or  net  worth  of  the  company)  will  at 
that  time  be  either  greater  or  less  than  the  amount  originally 
shown,  and  must  then  be  adjusted  into  Surplus  account. 
If  the  capital  has  undergone  certain  changes,  which  is 
usually  the  case,  suitable  adjusting  entries  must  be  made 
to  bring  it  into  harmony  with  present  conditions  as  reflected 
in  the  receiver's  final  official  report. 


CHAPTER    XXXV 

RECEIVERSHIP    AND     REORGANIZATION 

§  400.    Preliminaries  to  a  Receivership 

When  a  corporation  begins  to  go  behind  financially,  its 
officials  usually  continue  to  manage  it  long  after  the  danger 
point  is  passed.  The  creditors  or  bondholders  likewise  are 
loath  to  take  any  action  likely  to  precipitate  a  collapse,  and 
as  a  result  operations  usually  go  on  until  it  is  not  possible 
to  avoid  a  public  breakdown. 

The  ordinary  small  business  corporation,  under  such  cir- 
cumstances, will  call  a  meeting  of  its  creditors,  laj'-  a  state- 
ment of  its  affairs  before  them,  and  the  lawyer  representing 
the  corporation  will  ask  for  an  extension  of  credits,  propose 
a  composition,  or  offer  to  turn  over  the  business  to  an  as- 
signee or  a  friendly  receiver.  The  creditors  will  determine 
whether  it  is  best  to  extend  credits,  accept  any  proposed 
composition,  or  institute  insolvency  proceedings.  Experi- 
enced credit  men  representing  larger  creditors  easily  decide 
what  is  the  best  line  of  policy  and,  unless  matters  have  gone 
too  far,  they  generally  devise  some  plan  of  business  reor- 
ganization without  calling  in  the  aid  of  the  courts. 

In  the  case  of  larger  corporations  it  is  not  easy  to  devise 
any  plan  of  reorganization  without  some  relief  from  pressing 
claims  and  time  to  study  out  practicable  methods  of  reor- 
ganization. 

The  appointment  of  a  receiver  attains  this  end.  No  suits 
or  claims  can  be  pushed  against  the  corporation,  and  the 
business  and  property  are  preserved  from  loss.    Nothing  else 

487 


488  RECEIVERSHIP 

is  so  effectual ;  therefore  in  all  cases  where  a  larger  corpora- 
tion gets  into  financial  difficulties,  the  first  step  is  to  have 
a  receiver  appointed.  Preliminary  to  this,  those  most  in- 
terested confer  together,  and  decide  on  a  plan  of  action. 

§  401.    Reorganization  Agreement 

The  larger  bondholders,  when  they  face  default  in  in- 
terest payments  and  see  that  a  forced  sale  will  not  pay  what 
is  due,  usually  get  together  and  prepare  an  agreement  of 
bondholders  or  of  stockholders,  or  of  both,  by  which  they 
agree  to  deposit  their  holdings,  and  to  sign  the  agreement  to 
authorize  the  committee  in  charge  to  represent  their  interests 
in  the  outlined  plan  of  reorganization.  Those  who  devise 
the  plan  usually  appoint  a  committee  on  reorganization  to 
take  charge  of  the  whole  matter.  The  success  of  the  under- 
taking depends  on  the  ability  and  repute  of  the  members  of 
this  committee.  The  appointment  of  a  receiver  is  but  one 
incident  in  the  plan. 

The  following  is  typical  of  the  notices  sent  out  to  bond- 
holders or  stockholders,  or  both,  when  the  reorganization 
of  their  corporation  seems  necessary : 

To  THE  Holders  of 
Collateral  Trust  Four  Per  Cent  Gold  Bonds  of  2002 

OF 

Chicago,  Rock  Island  &  Pacific  R.  R.  Co. 

The  Railroad  Company  having  made  default  in  the  payment  of  the 
interest  due  May  i,  1914,  on  the  above  bonds,  it  is  imperative  that  bond- 
holders should  immediately  unite  for  the  protection  of  their  interests. 
Bondholders  who  have  not  already  done  so  should  deposit  their  bonds  at 
once  with  the  Depositary,  Central  Trust  Company  of  New  York,  at  its 
office,  No.  54  Wall  Street,  or  at  its  branch  office,  Madison  Avenue  and 
42d  Street,  New  York  City,  under  the  agreement  dated  February  26,  1914. 
Copies  of  said  agreement  may  be  obtained  from  the  Depositary  or 
from  the  Secretary  of  the  Committee.  Bonds  in  coupon  form  must  be 
accompanied  by  the  coupon  maturing  May  i,  1914.  Bonds  in  registered 
form  and  registered  coupon  bonds  must  be  accompanied  by  transfws 


RECEIVERSHIP   AND   REORGANIZATION 


489 


executed  by  the  registered  owner  or  his  attorney  duly  authorized.  Cer- 
tificates of  deposit  will  be  issued  by  the  Depositary  for  all  bonds  de- 
posited, and  in  due  course  application  will  be  made  for  listing  such 
certificates  of  deposit  on  the  New  York  Stock  Exchange. 

The  protective  agreement  permits  the  deposit  thereunder  of  such 
of  the  stock  of  The  Chicago,  Rock  Island  &  Pacific  Railway  Com- 
pany as  is  not  pledged  under  the  trust  agreement  securing  the  Collat- 
eral Trust  Bonds,  and  holders  of  said  stock  are  requested  to  deposit  the 
same  or  to  communicate  with  the  Committee. 

Any  bondholder  desiring  further  information  may  apply  to  the 
members  of  the  Committee  or  to  its  secretary. 

Dated,  New  York,  May  2,  1914. 
T  T  o   T^  James   Brown 

JOLINE,   LaRKIN   &   RaTHBONE,  t,  n  t     t. 

>,  o   TT  Bernard  M.  Baruch 

Cravath  &  Henderson,  tt  t- 

„         ',  Henry  Evans 

C  ounsel  t-  c 

Frederick  Strauss 

C.  E.  SiGLER,  Secretary,  J-  N.  Wallace,  Chairman 

54  Wall  Street,  New  York  City.  Committee 

A  depositary  for  the  bonds,  stock,  and  other  securities 
is  usually  named  in  the  agreement  of  reorganization,  or,  if 
not,  is  appointed  by  the  committee.  This  depositary  is 
usually  some  well-known  trust  company.  It  is  customary 
to  have  one  depositary  for  the  bonds  and  another  for  the 
stock,  and  still  another  for  the  unsecured  claims,  if  the  un- 
secured creditors  joined  in  the  agreement.  Some  form  of 
certificate  of  deposit  or  interim  receipt  is  given  to  each  one 
who  deposits  his  securities  and  signs  the  agreement.  There- 
after he  has  nothing  further  to  do  with  the  matter  unless 
the  depositors  are  called  upon  to  vote  in  regard  to  some 
vital  matter  concerning  the  reorganization. 

The  reorganization  committee  have  full  authority  and 
are  trustees  for  the  real  owners  of  the  securities.  As  trus- 
tees they  must  act  in  good  faith  and  may  not  seek  their 
personal  advantage.  They  cannot  make  any  material  altera- 
tion of  the  agreement  but  must  carry  it  out  according  to  its 
terms. 

Where  bonds  have  been  used  as  security  for  loans,  etc., 


490 


RECEIVERSHIP 


by  their  owners,  the  owner  is  the  proper  party  to  assent 
to  the  agreement  of  reorganization,  but  the  new  certificates 
must  be  issued  to  the  party  who  holds  the  bonds  as  security, 
unless  the  debt  has  been  paid  off  in  the  meantime.  If  the 
new  bonds  or  stock  prove  valueless,  the  party  who  holds 
them  as  security  may  still  enforce  his  original  claim  against 
the  party  who  pledged  them  with  him. 

The  reorganization  committee  usually  appoints  a  pur- 
chasing committee,  who  bid  for  the  property  at  the  fore- 
closure sale.  They  offer  in  payment  certificates  of  deposit 
of  the  various  depositaries,  showing  the  amounts  of  stock 
and  bonds,  etc.,  of  the  embarrassed  corporation  that  each 
has  deposited,  and  these  are  accepted  in  payment  for  the 
property  and  then  cancelled.  The  property  is  then  turned 
over  to  the  new  company. 

§  402.    Conditions  Preceding  Receivership 

The  receivership  forms  and  procedure  which  follow  are 
in  accordance  wath  the  practice  of  the  Court  of  Common 
Pleas  of  Pennsylvania,  and  perhaps  some  change  will  be 
necessary  for  acceptance  in  the  courts  of  other  states.  In 
New  York  State,  for  example,  the  form  of  account  required 
by  the  courts  differs  from  the  one  shown,  requiring  first  a 
summary  of  the  entire  matter,  while  full  particulars  are  con- 
tained in  supporting  schedules,  designated  A,  B,  C,  etc.  In 
every  case  it  is,  of  course,  required  that  the  matter  shall  be 
set  forth  logically  and  clearly. 

§  403.    Statement  of  Affairs 

To  illustrate  receivership  records  and  accounts,  let  us 
assume  that  the  Excelsior  Machine  Company,  unable  to 
meet  its  obligations,  was  placed  in  the  hands  of  a  receiver 
on  July  I,  1916.  A  statement  of  its  condition  before  and 
after  appraisement  is  given  below. 


RECEIVERSHIP  AND   REORGANIZATION  491 

Statement  of  Excelsior  Machine  Company 

At  Beginning  of  Receivership,  July  i,  1916 

Appraised 
Assets  Book  Value  Value 

Real  Estate,  Plant,  Good-Will,  etc $12,136,500.00    $11,536,500.00 

Investments  in  Subsidiary  and  Affiliated 
Companies    (pledged    with    trustee    of 

collateral  trust  bonds) 4,500,000.00        4,000,000.00 

Merchandise,    Materials,    Goods    in    Pro- 
cess, and  Supplies 2,178,960.00        2,100,000.00 

Deposit  with  Sinking  Fund  Trustee: 

Cash $350,400.00 

Bonds  of  This  Company.. .   1,945,800.00        2,296,200.00        2,296,200.00 


Accounts  Receivable 3,245,140.00        3,200,000.00 

Notes   Receivable* 2,862,100.00        2,440,100.00 

Cash  on  Hand  and  in  Banks 975.850.oo  945,850.00 


Total   $28,194,750.00    $26,518,650.00 


Appraised 

Liabilities  ^ook  Value           Value 

Capital  Stock — Preferred  7%  Cumulative  $5,000,000.00 

Capital    Stock — Common 5,000,000.00 

First  Mortgage  5%  Bonds,  due  1930 3,500,000.00      $3,500,000.00 

First  Mortgage  5%   Bonds,  due  July  i, 

1917 3,000,000.00        3,000,000.00 

Collateral  Trust  5%   Bonds,   secured  by 

deposit  of  collateral,  per  contra 4,000,000.00        4,000,000.00 

Bank  Loans  Unsecured 500,000.00          500,000.00 

Notes   Payable 1,490,500.00        1,490,500.00 

Accounts  Payable 2,375,640.00       2,375,640.00 

Accrued   Charges 328,250.00          328,250.00 

Reserves    for   Depreciation,    Bad    Debts, 

etc 897,510.00          897,510.00 

Liability  on  Notes  under  Discount,  esti- 
mated     60,000.00 


Total  Liabilities $26,091,900.00    $16,151,900.00 

Profit  and  Loss  Surplus 2,102,85000 


•Notes  under  discount  at  bank,  $400,000  additional. 


492  RECEIVERSHIP 

Balance,  Excess  of  Assets  over  Liabili- 
ties, being  Receiver's  Equity  in  the 
Estate 10,366,750.00 


Total *  $28,194,750.00    $26,518,650.00 


Note:  It  might  be  well  to  show  equities  only  in  the  statement  of 
appraisal,  deducting  all  secured  liabilities  from  the  assets  pledged  or 
mortgaged.  Bonds  held  by  the  trustee  may  be  deducted  from  the 
corresponding  liability  if  desired,  and  perhaps  the  trustee's  cash  also. 

§  404.    The  Receiver's  Activities 

Upon  his  appointment,  July  i,  19 16,  the  receiver  made 
an  appraisement  and  statement  of  the  company's  affairs  and 
filed  his  inventory  with  the  court.  It  revealed  the  following 
conditions,  all  of  which  are  included  in  the  above  statement. 

1.  That  the  real  estate,  plant,  and  good-will  should  be 

reduced  at  least  $600,000,  but  the  depreciation 
reserve  should  not  be  disturbed. 

2.  That  the  investments  had  declined  $500,000  below 

the  book  value  stated. 

3.  That  the  merchandise  and  material  should  be  re- 

duced to  $2,100,000. 

4.  That  the  accounts  receivable  were  estimated  to  be 

worth  $3,200,000 

5.  That  notes  receivable  were  doubtful  to  the  extent 

of  $420,000. 

6.  That  at  least  $60,000  of  the  notes  under  discount 

would  be  dishonored. 

7.  That  $30,000  for  dishonored  notes  of  a  customer 

had  been  charged  to  the  company's  account  by 
the  bank. 

8.  That  building  extensions  now  in  operation  should 

be  continued  by  the  receiver. 

The  receivership  was  terminated  December  31,  19 16,  at 
which  time  a  reorganization  took  place.     The  statement  of 


RECEIVERSHIP   AND   REORGANIZATION  493 

the  receiver  at  the  date  of  his  withdrawal,  after  a  tenure 
of  six  months,  is  shown  herewith.  It  contains  the  ad- 
justments suggested  in  his  statement  to  the  court,  in  addition 
to  the  following  transactions  carried  out  during  his  incum- 
bency, which  were  entered  in  his  separate  ledger : 

1.  $1,200,000  of  6%  receiver's  certificates  were  issued, 

due  in  four  months,  dated  August  i,  and  sold 
at  98. 

2.  Building  extensions  were  completed  at  a  cost  of 

$500,000. 

3.  The  factory  was  kept  running  at  a  considerable  re- 

duction in  capacity. 

4.  Goods  were  sold  from  stock  for  cash  at  the  best 

prices  obtainable,  bringing  in  $57,680. 

5.  Orders    were    completed    and   billed,    aggregating 

$230,000,  for  which  cash  was  received;  the 
merchandise,  etc.,  on  hand  being  valued  at 
$2,100,000. 

6.  $1,724,440   of  the   accounts   receivable   were   col- 

lected; also  $1,050,880  of  the  notes  receivable, 
of  which  $75,000  applied  to  notes  written  off  as 
doubtful. 

7.  Accrued  charges  were  paid  for  taxes  and  labor  of 

$81,100,  and  $196,200  additional  for  wages  of 
workmen. 

8.  Material  for  use  in  factory  amounting  to  $72,000 

was  purchased  for  cash. 

9.  Various  expenses  paid  in  cash  amounted  to  $76,500, 

legal  fees  $22,500,  and  compensation  of  receiver 
$10,000. 

§  405.    Accounting  Procedure 

The  accounting  procedure  to  record  the  receiver's  activi- 
ties in  this  case  require  the  following  records  and  entries : 


^gj^  RECEIVERSHIP 

1.  Receiver's  records  and  entries  on  taking  charge. 

2.  Receiver's  records  during  his  management  of  the 

business. 

3.  Receiver's  records  and  entries  upon  settlement  of 

the  estate. 

4.  Statement  of  the  receiver's  account  to  the  court. 

5.  Entries  to  adjust  the  books  of  the  company  upon 

appointment  of  the  receiver. 

6.  Entries  and  adjustments  on  the  books  of  the  com- 

pany at  the  time  the  receiver  is  discharged. 

§  406.     (i)  Receiver's  Records  on  Taking  Charge 

The  adjustment  of  assets  as  a  result  of  appraisements 
reduces  the  surplus  of  the  company  to  $366,750,  being  a 
shrinkage  of  $1,736,100  (§  411).  The  net  assets  of  the 
company  now  amount  to  $10,366,750,  as  shown  by  the 
figures  given  in  the  appraisal  statement.  The  receiver  opens 
his  own  separate  ledger  and  brings  into  it  the  assets  and 
liabilities  (the  latter  sometimes  omitted),  as  per  appraise- 
ment. In  order  that  notes  and  accounts  receivable  written 
oflf  may  not  be  lost  sight  of,  it  is  good  practice  to  carry 
them  on  the  books,  say  at  a  value  of  $1  each.  The  receiver's 
opening  entry  is  as  follows : 

Opening  Entry,  July  i,  1916 

Assets 

Real  Estate,  Plant,  Good- Will,  etc $11,536,500 

Investments  in  Subsidiary  and  Affiliated 

Companies,   Pledged 4,000,000 

Merchandise,  Materials,  Goods  in  Process, 

etc 2,100,000 

Deposit  with  Sinking  Fund  Trustee 2,296,200 

Accounts  Receivable 3,200,000 

Notes   Receivable 2,440,100 

Cash  on  Hand  and  in  Banks 945^50 


RECEIVERSHIP  AND   REORGANIZATION  ^95 

Liabilities 
To  First  Mortgage  5%  Bonds,  due 

^930 $3,500,000 

"    First  Mortgage  5%  Bonds,  due 

J"'y  I'  1917 3,000,000 

"  Collateral  Trust  5%  Bonds 
(secured  by  deposit  of  colla- 
teral, per  contra) 4,000,000 

Bank  Loans  Unsecured coo  000 

"    Notes   Payable 1,490^500 

"    Accounts  Payable 2,375,640 

Accrued  Charges 328,2150 

"    Reserves  for  Depreciation,  Bad 

Debts,  etc 897,510 

Notes  under  Discount 60,000 

"    Receiver's    Equity,    Estate    of 

Excelsior  Machine  Company  10,366,750 


$26,518,650  $26,518,650 
To  record  assets  and  liabilities  of  the 
Excelsior  Machine  Company,  in  re- 
ceivership, taken  over  this  day  by 
decree  of  the  Court.  Appraised 
values  used,  and  all  liabilities  stated. 

In  opening-  the  receiver's  ledger  the  various  accounts 
should,  of  course,  be  properly  classified  and  located.  Space 
must  also  be  provided  for  the  current  business  transactions 
of  the  receiver.  If  the  liabilities  were  omitted,  as  is  fre- 
quently the  case,  it  is  apparent  that  the  receiver's  equity 
account  would  show  a  credit  of  $26,518,650,  the  total  value 
of  assets;  or,  if  only  the  property  equities  were  entered,  the 
amount  would  be  $16,018,650.  The  sinking  fund  deposit 
of  $2,296,200  might  be  deducted  from  the  outstanding 
bonded  debt  in  obtaining  the  property  equity,  but  this  would 
not  make  any  change  in  the  amount  of  the  receiver's  equity 
in  the  estate. 


496 


RECEIVERSHIP 


§  407.    (2)  Record  of  Receiver's  Transactions 

The  receiver  must  keep  a  strict  record  of  all  business 
activities  in  order  that  he  may  give  a  correct  account  of 
them  to  the  court.  The  entries  are  made  in  the  cash  book, 
though  certain  of  them  might  properly  be  contained  in  the 
journal.  The  result  of  these  entries  is  summarized  in  the 
following  cash  account. 

Receiver's  Cash   Account 

(Being  a  record  of  his  transactions  from  July  i,  1916, 
to  December  31,  1916 


Receipts 

Payment 

S 

Balance,    Received 

Discount    on    Re- 

from  Estate 

$945,850.00 

ceiver's  Certificates 

$24,000.00 

Receiver's    Certifi- 

Real   Estate    Opera- 

cates   

1,200,000.00 

tions    

500,000.00 

Merchandise    

57,680.00 

Accrued   Charges — 

81,100.00 

Merchandise    

230,000.00 

Wages  

196,200.00 

Accounts  Receivable. 

724,440.00 

Merchandise    

72,000.00 

Notes  Receivable. . . . 

975,880.00 

Expenses  

76,500.00 
22,500.00 

Notes  Receivable 

Legal  Expenses 

(Doubtful)    

75,000.00 

Salary  of  Receiver. . 
Receiver's     Certifi- 

10,000.00 

cates  Paid 

1,200,000.00 

Interest  on  Above... 
Total   

24,000.00 

$2,206,300.00 

Balance,    Cash    in 

Hand   

3,002,550.00 

$5,208,850.00 

$5,208,850.00 

§  408.    (3)  Receiver's  Closing  Entries 

At  the  termination  of  his  activities  and  before  the  re- 
organization takes  place,  the  receiver  adjusts  his  ledger 
accounts  to  determine  the  status  of  the  estate.  After  all 
entries  having  to  do  with  merchandise  have  been  posted  to 


RECEIVERSHIP   AND   REORGANIZATION 


497 


that  account,  disregarding  the  conversion  of  material  into 
finished  or  partly  finished  product,  it  will  appear  as  follows : 

Merchandise  Account 


Values    Taken    Over 

at  Beginning $2,100,000.00 

Purchases 72,000.00 

Profit  265,680.00 

$2,437,680.00 


Cash  Sales $57,680.00 

Cash  Sales 230,000.00 

Inventory    Valuation 

at  End 2,150,000.00 

$2,43.7,680.00 


Below  are  given  the  various  entries  to  close  the  receiver's 
loss  and  gain  accounts,  followed  by  the  Profit  and  Loss 
account  showing  a  net  loss  of  $12,520  resulting  from  the 
period  of  receivership  supervision. 

December  31,  1916 

Merchandise,  Material,  etc $265,680 

Notes  Receivable  (Doubtful) 75.ooo 

To  Profit  and  Loss $340,68o 

To  record  profit  on  sales  on  completion  of 
orders,  and  collection  of  doubtful  notes. 

Profit  and  Loss $353.200 

To  Discount  on  Receiver's  Certificates.  $24,000 

"    Wages    196,200 

"    Expenses   76,500 

"    Legal  Expenses 22,500 

"    Receiver's  Salary 10,000 

"    Interest  on  Receiver's  Certificates. . .  24,000 
Entries  to  close  all  nominal  accounts  into 
Profit  and  Loss. 

Receiver's  Equity  in  Estate $12,520 

To  Profit  and  Loss $12,520 

To  close    Profit   and   Loss   into   receiver's 
equity  account. 


498 


RECEIVERSHIP 


Receiver's  Profit  and  Loss  Account 
For  Period  from  July  i,  1916,  to  December  31,  1916 


Discount  on  Receiver's 

Certificates $24,000.00 

Wages  to  Workmen.. .  196,200.00 

Expenses,   General 76,500.00 

Legal  Expenses 22,500.00 

Receiver's  Salary 10,000.00 

Interest  on  Receiver's 

Certificates    24,000.00 


$353,200.00 


Profit  on  Merchandise 
Account   $265,680.00 

Collection  of  Notes 
Receivable  (Doubt- 
ful)           75,000.00 

Receiver's  Net  Loss.. .       12,520.00 


$353,200.00 


The  receiver's  equity  account,  showing  a  balance  of 
$10,354,230,  as  per  his  accompanying"  statement,  should  be 
about  as  follows : 

Receiver's  Equity  Account 

(Showing  equity  in  estate  at  beginning  and  termination) 


Net    Loss    during 

Receivership $12,520.00 

Balance    of    Estate, 

at  Termination . . .     10,354,230.00 


$10,366,750.00 


Balance    of    Estate, 
at  Beginning $10,366,750.00 


$10,366,750.00 


Balance  $10,354,230.00 


Since  a  reorganization  of  the  company  is  to  take  place 
under  a  reorganization  committee,  the  receiver  hands  over 
the  entire  estate  as  now  constituted  without  making  any 
settlement  disbursements.  An  entry  for  closing,  somewhat 
similar  to  the  following,  is  required ;  giving,  of  course,  the 
various  assets  and  liabilities  in  detail : 


RECEIVERSHIP   AND   REORGANIZATION  499 

December  31,  1916 

Receiver's  Equity  Account $10,354,230 

Sundry  Liabilities  (itemized) 16,070,800 

To  Sundry  Assets  (itemized) $26,425,030 

To  close  receiver's  accounts  on  term- 
ination of  receivership,  all  assets  and 
liabilities  of  the  estate  having  been 
transferred  to  the  Reorganization 
Committee,  per  order  of  the  Court, 
without  making  distribution  of 
assets. 

The  aggregate  assets  and  liabilities  are  included  in  the 
above  entry  (instead  of  the  equities  only  as  shown  in  the 
receiver's  final  statement),  because  the  assets  and  liabilities 
are  all  spread  separately  in  the  book  accounts  of  the  receiver. 

As  a  result  of  all  transactions,  the  receiver's  statement 
at  time  of  closing  will  appear  as  follows : 

Statement  of  Receiver  of  Excelsior  Machine 

Company 

At  Termination  cf  Receivership  Jurisdiction,  December  31,  1916 

Assets 

\tal  Estate,  Plant,  Good-Will,  etc $12,036,500.00 

Less  Encumbrance: 

First    Mortgage    5% 

Bonds,  due  1930 $3,500,000.00 

First    Mortgage    5% 
Bonds,  due  1917 3,000,000.00       6,500,000.00 


Receiver's  Equity  in  Property $5o36,50o.oo 

Investments    in    Affiliiited 

Companies   $4,000,000.00 

Less    Deposit    to     Secure 

Collateral  Trust  Bonds.     4.000,000.00  (nil) 


Merchandise,  Material,  Supplies,  etc 2,150,000.00 

Sinking  Fund  Deposit  with  Trustee*....        2,296,200.00 

would  remain  the  same  in  either  case. 


500 


RECEIVERSHIP 


Interest  Accrued  on  Sinking  Fund  De- 
posit    (omitted) 

Accounts  Receivable 1,475,560.00 

Notes  Receivable 1,464,220.00 

Cash  on  Hand  and  in  Bank 3,002.550.00 


Total  Equity  in  Assets $15,925,030.00 

Liabilities 

Bank  Loans  Unsecured $500,000.00 

Notes  Payable 1,490,500.00 

Accounts   Payable 2,375,640.00 

Accrued  Charges,  remaining 247,150.00 

Reserves  for  Depreciation,  etc 897,510.00 

Liability  on  Notes  Discounted 60,000.00 


Total   Liabilities 5,570,800.00 


Receiver's  Equity,  Excess  of  Assets  over  Liabilities $10,354,230.00 

§  409.     (4)  Receiver's  Statement  to  the  Court 

The  receiver  may  present  to  the  court  only  one  account 
or  statement,  known  as  the  "First  and  Final  Account,"  or 
he  may  present  several.  An  auditor  is  usually  appointed 
by  the  court  to  audit,  examine,  vouch,  and  pass  upon  the 
receiver's  accounts  in  detail  and  to  report  to  the  court  be- 
fore distributions  are  made,  or  dividends  paid  to  creditors. 
The  auditor  causes  an  advertisement  to  be  placed  in  the 
papers,  giving  notice  that  he  will  sit  on  a  certain  date  to 
receive  claims  and  hear  complaints  on  the  audited  statement. 
The  hearing  may  even  be  adjourned  one  or  more  times. 
The  auditor  generally  makes  up  a  statement  of  his  own  from 
that  presented  by  the  receiver,  though  it  is  usually  briefer 
and  may  even  be  only  a  summary  of  the  receiver's  trans- 
actions. It  recites  in  brief,  as  a  rule,  the  activities  of  the 
receiver  as  an  introduction  to  the  audited  statement,  all  of 
which  is  later  filed  with  the  court,  to  be  kept  as  a  permanent 
record. 


RECEIVERSHIP  AND   REORGANIZATION  cqi 

First  and  Final  Account  of  Charles  W.  Bennett, 
Receiver  for  the  Excelsior  Machine  Company 

December  31,  1916 

Debits 
The  Receiver  charges  himself  as  follows: 

Inventory  and  Appraisement  of  Assets  taken  over  July  i,  1916: 
Equity  in  Real  Estate,  Plant,  Good-Will,  etc.  $5,036,500.00 
Equity  in  Investments  of  Subsidiary  Com- 
panies          (none) 

Merchandise,  Materials,  Goods  in  Process, 

and  Supplies 2,100,000.00 

Sinking  Fund  Deposit  with  Trustee* 2,296,200.00 

Accounts  Receivable 3,200,000.00 

Notes  Receivable 2,440,100.00 

Cash  on  Hand  and  in  Banks 945,850.00 

Total  Assets  taken  over $16,018,650.00 

Additions  to  Capital 
For  Outlay  Increasing  Value  of  Real  Es- 
tate and  Properties $500,000.00 

Increase  in  Cash,  per  Cash  Account 2,056,700.00 

Increase  in  Value  of  Merchandise 50,000.00 

Total  Increase  in  Assets 2,606,700.00 

Total  Value  of  Assets  Taken  Over  and  Acquired.     $18,625,350.00 

Deductions  from  Capital 

Assets  Realized  and  Collected  as  Follows : 

Accounts  Receivable  Collected $1,724,440.00 

Notes  Receivable  Collected 975,880.00 

Total  Deductions 2,700,320.00 

Balance,  Receiver's  Equity  in  Estate $15,925,030.00 

The  above,  it  should  be  noted,  omits  all  liabilities,  ex- 
cepting $81,100  of  previously  accrued  charges  paid  off  by 

"This  is  not  in  the  hands  of  the  receiver,  but  if  omitted  should  be  added  to 
the  equity  in  properties,  increasing  the  latter  to  $7,332,700. 


502 


RECEIVERSHIP 


the  receiver,  and  therefore  represents  equities  in  all  the  assets 
of  the  estate.  If  the  liabilities  were  stated,  the  balance  of 
the  estate  would  be  reduced  to  $10,354,230,  the  amount 
shown  in  the  receiver's  equity  account  (§  408).  The  re- 
ceiver's statement  to  the  court  in  this  case,  however,  does 
not  take  the  liabilities  into  consideration,  but  does  include 
all  activities  during  his  tenure  as  receiver  as  shown  by  the 
statement  of  trading  and  the  statement  of  cash  received  and 
disbursed. 

The  books  and  records  should  not  be  confused  with  the 
account  rendered  to  the  court. 


Receiver's  Statement  of  Trading 

Expenditures 

Inventory    Received    from    Estate    at    Be- 
ginning    $2,100,000.00 

Purchases  of  Merchandise 72,000.00 

Discount  on  Receiver's  Certificates 24,000.00 

Wages  to  Workmen 196,200.00 

Expenses,  General 76,500.00 

Legal  Expense 22,500.00 

Receiver's  Salary 10,000.00 

Interest  on  Receiver's  Certificates 24,000.00 

Total  Expenditures $2,525,2oaoo 

Income 

Inventory  of  Assets  of  Estate,  on  Hand  at 

Qose  of  Receivership $2,150,000.00 

Collection  of  Doubtful  Notes 75,000.00 

Sales  of  Merchandise 230,000.00 

Sales  of  Merchandise 57,680.00 

Total  Income 2,512,680.00 

Excess  of  Expenditures   over  Income,   being  Net  Loss 
during  Receiver's  Operations $12,520.00 


RECEIVERSHIP   AND   REORGANIZATION  503 

Statement  of  Receipts  and  Disbursements 
Receiver's  Cash  Account 

(Being  a  record  of  his  transactions  from  July  i,  1916 
to  December  31,  1916) 

Cash  Received 

Balance,  Received  from  Estate $945,850.00 

Cash  Received  from : 

Receiver's   Certificates $1,200,000.00 

Merchandise  230,000.00 

Merchandise  57,680.00 

Accounts  Receivable 1,724,440.00 

Notes  Receivable  975,880.00 

Notes  Receivable  (Doubtful) 75,000.00      4,263,000.00 

Total   $5,208,850.00" 

Cash  Paid  Out 

Discount  on  Receiver's  Certificates $24,000.00 

Real  Estate  Operations 500,000.00 

Accrued   Charges 81,100.00 

Wages '. 196,200.00 

Merchandise  72,000.00 

Expenses   76,500.00 

Legal  Expenses 22,500.00 

Salary  of  Receiver 10,000.00 

Receiver's  Certificates  Paid 1,200,000.00 

Interest  on  Above 24,000.00 

Total    2,206,300.00 

Balance,  Cash  in  Hands  of  Receiver $3,002,550.00 

Referred  to  Auditor  December  31,  1916. 

§  410.  (5)  Adjustment  of  Company's  Books  on  Appoint- 
ment of  Receiver 
The  books  of  the  embarrassed  company  are  frequently 
left  in  the  condition  that  prevailed  when  the  receivership 
began.  In  that  case  no  entries  of  any  kind  are  made  until 
the  time  of  reorganization,  when  the  abandoned  accounts 


204  RECEIVERSHIP 

may  be  adjusted  to  the  new  conditions.  Sometimes  it  may 
be  thought  advisable,  however,  to  adjust  the  accounts  at 
both  the  beginning  and  end  of  receivership  jurisdiction. 
This  is  assumed  to  have  been  done  with  the  books  of  the 
Excelsior  Machine  Company. 

By  referring  to  the  appraisement,  it  will  be  seen  that 
numerous  adjustments  of  values  were  made.  The  losses 
sustained  thereby  should  be  adjusted  into  Surplus  account 
in  order  to  bring  the  ledger  into  agreement  with  the  prop- 
erty valuations  taken  over  by  the  receiver. 

§  411.    Entries  to  Adjust  Inventories 

Shrinkage  in  assets  occasioned  by  the  appraisements  are 
adjusted  through  the  following  entry  on  the  books  of  the 
company : 

July  I,  1916 

Surplus   $1,736,100 

To  Real  Estate,  Plant,  etc $600,000 

"    Investments  500,000 

"    Merchandise,  etc 78,960 

"   Accounts  Receivable 45.140 

"    Notes  Receivable 422,000 

"    Cash   30,000 

"    Notes  under  Discount 60,000 

To  adjust  losses  and  shrinkage  in  as- 
sets, per  appraisement  of  receiver. 

It  will  be  seen  that  this  adjustment  reduces  the  surplus 
of  the  company  from  $2,102,850  (§  406)  to  $366,750. 

Closing  entries  should  then  be  made,  charging  the  re- 
ceiver with  the  assets  and  liabilities  taken  over,  as  follows : 

July  I,  1916 

Receiver   $26,518,650 

To  Real  Estate,  Plant,  Good-Will, 

etc $11,536,500 


RECEIVERSHIP   AND   REORGANIZATION  cqc 

To  Investments  in  Subsidiary  and 

Affiliated  Companies,  Pledged  4,000,000 

"    Merchandise,  Materials,  Goods 

in  Process,  etc 2,100,000 

"    Deposit     with     Sinking     Fund 

Trustee 2,296,200 

Accounts  Receivable 3,200,000 

"    Notes   Receivable 2,440,100 

Cash  on  Hand  and  in  Banks . ,  945,850 

To  record  transfer  of  Company's  assets 
to  the  receiver,  as  per  order  of  the 
Court  

First  Mortgage  $%  Bonds,  due  1930 $3,500,000 

First  Mortgage  5%  Bonds,  due  July  i,  1917       3,000,000 
Collateral  Trust  5%  Bonds  (secured,  per 

contra) 4.000,000 

Bank  Loans,  Unsecured 500,000 

Notes  Payable 1,490,500 

Accounts  Payable 2,375,640 

Accrued  Charges 328,250 

Reserves  for  Depreciation,  Bad  Debts,  etc.         897,510 

Notes  under  Discount 60,000 

To  Receiver $16,151,900 

For  liabilities  taken  over  by  the  re- 
ceiver this  day,  by  order  of  the 
Court. 

The  receiver's  account  in  the  company's  ledger  now 
shows  a  debit  balance  of  $10,366,750,  corresponding  with 
the  estate  equity  account  of  the  receiver  in  his  own  ledger. 
The  company's  accounts  after  transferring  the  assets  and 
liabilities  to  the  receiver  appear  as  follows : 

Tri.\l  Balance,  July  i,  1916 

Receiver's   Account $10,366,750.00 

Capital    Stock— Preferred $5,000,000.00 

Capital   Stock — Common 5,000,000.00 

Surplus 366,750.00 

$10,366^750.00    $10,366,750.00 


5o6  RECEIVERSHIP 

§  412.    (6)  Entries  on  Termination  of  Receivership 

It  is  not  ordinarily  advisable  for  the  company  to  take 
the  assets  and  liabilities  back  into  its  ledger  accounts  until 
the  reorganization  takes  place.  At  that  time  the  various 
adjustments  should,  of  course,  be  made  in  order  to  reopen 
the  ledger  in  harmony  with  the  reorganized  conditions.  If 
it  is  thought  desirable,  however,  to  take  the  assets  and  lia- 
bilities as  shown  by  the  receiver's  final  statement  into  the 
company's  ledger  accounts,  with  the  idea  of  making  reor- 
ganization adjustments  later,  the  entry  would  be: 
Closing  Entry,  December  31,  1916 
Debits 

Real  Estate,  Plant,  and  Good- Will $12,036,500 

Investments    4,000,000 

Merchandise,  Materials,  etc 2,150,000 

Sinking  Fund  Trustee 2,296,200 

Accounts  Receivable 1,475,560 

Notes  Receivable 1,464,220 

Cash 3*002,550 

Credits 
To  First  Mortgage  5%  Bonds,  due 

1930 $3,500,000 

"    First  Mortgage  5%  Bonds,  due 

July  I,  1917 3,000,000 

"    Collateral  Trust  Bonds 4,000,000 

"    Bank    Loans 500,000 

**    Notes  Payable 1,490,500 

**   Accounts  Payable 2,375,640 

*'   Accrued  Charges 247,150 

"    Reserve  for  Depreciation,  etc..  897,510 
"    Liability  on  Notes  under  Dis- 
count      60,000 

"    Receiver's    Account 10,354,230 

To  record  existing  assets  and  liabili- 
ties on  books  of  the  company  on 
termination  of  receivership  (preced- 
ing the  reorganization  adjustments). 


RECEIVERSHIP  AND   REORGANIZATION  507 

It  will  be  seen  that  there  is  a  difference  of  $12,520  in  the 
receiver's  account,  which  amount  must  now  be  adjusted 
into  surplus  by  the  following  entry : 

Surplus   $12,520 

To  Receiver $12,520 

To  close  and  adjust  receiver's  account  into 
Surplus. 

The  Surplus  account  now  shows  a  credit  balance  of 
$354,230,  thus  indicating  a  heavy  shrinkage  as  a  result  of 
the  receivership  and  its  resulting  destruction  of  values. 
After  the  reorganization  takes  place,  these  ledger  accounts 
will,  of  course,  be  readjusted  to  harmonize  with  the  new 
conditions  as  adopted  by  the  committee  of  reorganization. 

In  the  case  of  railways  and  public  utilities,  there  is  good 
reason  for  keeping  the  company's  books  continuously  during 
the  receivership  regardless  of  the  receiver's  records,  since 
it  is  usually  a  foregone  conclusion  that,  because  of  their 
necessary  service  to  the  community,  they  will  continue  opera- 
tions as  usual,  both  during  and  subsequent  to  the  receivership 
jurisdiction. 


CHAPTER   XXXVI 

RECEIVERSHIP   AND    SALE 

§  413.    Introductory 

Reorganization  following  the  appointment  of  a  receiver, 
and  the  necessary  accounting  procedure  have  been  set  forth 
in  the  preceding  chapter.  If,  as  it  may  happen,  a  reor- 
ganization cannot  be  effected,  it  becomes  the  duty  of  the 
receiver  to  sell  the  property  and  use  the  proceeds  of  the 
sale  in  paying  ( i )  the  expenses  of  the  receivership  and  sale, 
(2)  the  creditors  or  bondholders  of  the  corporation.  If 
anything  remained  the  corporation  would  be  entitled  to 
it.  In  the  case  that  follows  the  receiver  was  able  to  sell  the 
property  so  as  to  give  the  old  stockholders  a  liberal  cash 
payment  and  stock  in  the  new  corporation.  This  is  an 
unusually  good  showing.  The  payment  to  the  stockholders 
would  involve  the  dissolution  of  the  old  corporation ;  other- 
wise the  distribution  would  be  illegal. 

§  414.    Statement  of  Condition 

The  following  statements  are  informal  and  only  intended 
to  illustrate  the  principles  involved.  A  more  formal  pres- 
entation of  a  receiver's  accounts  will  be  found  in  the  next 
chapter. 

The  Willis  Grocery  Company  was  placed  in  the  hands 
of  a  receiver  on  April  i,  191 6,  at  the  request  of  merchandise 
creditors.  William  Hart  was  appointed  receiver  with  full 
authority  to  continue  the  business  under  court  supervision 
and  to  conserve  the  company's  property,  in  the  hope  of 
effecting  a  favorable  settlement  with  the  creditors.  Follow- 
ing is  the  statement  before  making  appraisement : 

508 


RECEIVERSHIP  AND   SALE 


509 


Statement  of  the  Willis  Grocery  Company 

As  OF  April  i,  1916 

(Showing  condition  upon  appointment  of  receiver,  William  Hart, 
before  making  appraisements  and  book  adjustments.) 


Assets 

Buildings,     Properties, 

and   Warehouses $50,000.00 

Store    Equipment 10,000.00 

Delivery    Equipment..  10,000.00 

Merchandise   in   Stock  75,600.00 

Produce  on  Hand 11,850.00 

Accounts  Receivable..  85,410.00 

Notes   Receivable 12,500.00 

Investments  in  Bonds 
of  Unlisted  Com- 
panies    25,000.00 

Cash  on  Hand 5,820.00 

Impairment  of  Capital  5,280.00 


$291,460.00 


Liabilities 

Capital   Stock $200,000.00 

Less   Uncalled   Sub- 
scriptions         50,000.00 

Outstanding   $150,000.00 

Mortgage  on  Real  Es- 
tate         25,000.00 

Bank  Loans  Secured 
by  Deposit  of  In- 
vestments (per  con- 
tra)           10,000.00 

Notes  Payable 15,000.00 

Accounts  Payable 91,460.00 

$291,460.00 


Experts  appointed  by  the  court  to  appraise  the  assets 
made  the  following  reductions,  based  partly  on  going  values : 


Value  of  Merchandise  reduced  by $10,000.00 

Value  of  Produce  reduced  by 2,000.00 

Accounts  Receivable  written  off  as  worthless 4,270.00 

Notes  Receivable  written  off 1,800.00 

Depreciation  of  Properties  and  Buildings  written  off 6,200.00 

Depreciation  of  Store  Equipment 2,000.00 

Depreciation  of  Delivery  Equipment 2,000.00 

Value  of  Investments  reduced  by 3,000.00 

Total   reductions $31,270.00 


The  receiver,  after  complying  with  all  legal  require- 
ments, continued  the  business  for  five  months  in  an  effort 
to  put  the  company  on  its  feet,  but  without  success.     Pro- 


^lO  RECEIVERSHIP 

posals  for  reorganization  were  not  acceptable  to  the  unse- 
cured creditors  or  to  the  stockholders.  On  September  i, 
1916,  a  meeting  of  stockholders  and  creditors  was  called, 
and  a  proposition  to  sell  the  business  as  a  going  concern 
to  a  new  corporation  was  accepted.  The  t6rms  of  sale  were 
as  follows : 

1.  Payment  through  the  receiver  to  the  former  stock- 

holders as  follows : 

(a)  $60,000  in  stock  of  the  new  company. 

(b)  $50,000  in  cash,  to  be  turned  over  out  of 
the  assets. 

2.  New  company  to  take  over  all  remaining  assets  and 

assume  all  liabilities,  continuing  the  former  set 
of  books. 

3.  All  expenses  of  sale  to  be  met  by  the  purchasers. 
The  transactions  of  the  receiver  up  to  September  i  are 

shown  below : 

Results  of  Operations  by  the  Receiver 
From  April  i  to  September  i,  1916 

Receipts 

Collections  from  Notes  Receivable $5,500.00 

Collections  from  Accounts  Receivable 22,640.00 

Sales  of  Merchandise 53.750.oo 

Sales  of  Produce 24,800.00 

Expenditures 

Purchases  of  Merchandise $9,620.00 

Purchases  of  Produce 13,110.00 

Payment  of  Wages 4,000.00 

Operating   Expenses 4,500.00 

Expenses  and  Salary  (Nominal)  of  Receiver 1,500.00 

Interest  Accrued  on  Mortgage,  September  i,  1916,  Unpaid...  625.00 

The  accounting  procedure  which  follows  illustrates  on 
the  books  of  the  dissolving  company : 


RECEIVERSHIP  AND  SALE  ten 

1.  The   receiver's   records   and   entries  upon   taking 

charge. 

2.  The    receiver's    entries    for    his    official    business 

transactions. 

3.  The  balance  sheet  of  the  company  on  September  1, 

191 6,  as  presented  by  the  receiver  to  the  meeting 
of  stockholders  and  creditors. 

4.  The  receiver's  entries  upon  dissolution  of  the  com- 

pany and  sale  of  its  assets  and  liabilities. 

§  415.     (1)  Receiver's  Records  on  Taking  Charge 

The  receiver's  statement  upon  appointment  shows  a 
deficit  of  $36,550  after  allowing  for  depreciation  and  de- 
ductions. The  statement  is  similar  to  the  one  shown  in 
§  414,  but  with  asset  values  reduced  and  the  Capital  Stock 
account  usually  omitted.  The  appraisal  statement  is  pre- 
sented to  the  court  for  record. 

The  receiver  continues  the  same  books  of  account  after 
making  the  required  adjustments,  so  that  only  adjusted 
balances  of  accounts  appear  in  the  ledger.  Under  these  con- 
ditions his  official  transactions  are  entered  up  as  in  any 
ordinary  business.  The  adjusting  entries  to  harmonize  the 
accounts  with  the  revised  statement  of  condition  are  given 
below.  The  plan  followed  in  this  instance  might  not  apply 
in  every  case  or  be  acceptable  to  all  accountants,  yet  it  is 
simple  and  can  be  readily  understood.  The  inventories  of 
merchandise  and  produce  have  been  entered  to  the  accounts 
without  journal  entries. 

First  Entry 

April  I,  1916 

Profit  and  Loss $31,270 

To  Merchandise   $10,000 

"    Produce   2,000 

"  Accounts  Receivable 4>270 


5 12  RECEIVERSHIP 

To  Notes  Receivable i,8oo 

"    Buildings  and  Properties 6,200 

"    Store    Equipment 2,000 

"    Delivery  Equipment 2,000 

"    Investments  3,000 

To  record  the  loss  on  notes  and  accounts  re- 
ceivable and  reduction  in  values  of  stock, 
properties,  and  equipment — to  harmonize  the 
accounts  with  the  receiver's  statement  of 
affairs. 


The  ledger  now  shows  an  impairment  or  debit  to  Profit 
and  Loss  of  $36,550,  and  with  an  outstanding  capital  of 
$150,000,  this  leaves  an  equity  of  only  $113,450.  These 
two  accounts  should  not  appear  in  the  receiver's  ledger  at 
all,  and  therefore  are  closed  out  by  journal  entry,  leaving 
instead  a  credit  balance  of  $113,450  to  "Willis  Grocery 
Company  Estate"  account.  The  required  journal  entry 
would  be  as  follows : 


April  I,  1916 
Second  Entry 

Capital    Stock $150,000 

To  Profit  and  Loss $36,550 

"    Willis  Grocery  Company  Estate 113,450 

To  close  the  Capital  Stock  and  Profit  and 
Loss  accounts  and  to  open  Willis  Grocery 
Estate  account  to  show  the  receiver's  equity 
therein. 


§  416.     (2)  Entries  to  Record  Receiver's  Activities 

The  recording  of  the  receiver's  activities  would  be  made 
in  the  cash  book  and  journal.  The  cash  book  entries  are 
summarized  in  the  cash  account  given  below  and  the  closing 
journal  entries  follow; 


RECEIVERSHIP   AND  SALE 
Receiver's  Cash  Account 

April  i  to  September  i,  1916 


513 


Receipts 

Disbursements 

Balance     taken     over 

Merchandise  Purchases 

$9,620.00 

April   I,   1916 

$5,820.00 

Produce   Purchases.... 

13,110.00 

Notes   Receivable 

5,500.00 

Payment  of  Wages 

4,000.00 

Accounts  Receivable.. 

22,640.00 

Operating    Expenses . . . 

4,500.00 

Sales  of  Merchandise. 

.     53.750.00 

Expenses    and    Salary 

Sales  of  Produce 

.     24,800.00 

of    Receiver 

Total  

1,500.00 

$32,730.00 

Balance   in   Hands   of 

Receiver    

79,780.00 

Total    

$112,51000 

$112,510.00 

September  i,  1916 
First  Entry 

Produce    $4,340 

Merchandise  530 

To  Profit  and  Loss 

For  profit  on  sale  of  produce  and  merchandise. 


$4,870 


Second  Entry 

Profit  and  Loss $10,625 

To  Wages    

"    Expenses   

"    Receivership    Expenses 

"   Accrued  Interest 

To  close  above  accounts  into  Profit  and  Loss, 
and  to  enter  up  accrued  interest. 


$4,000 

4,500 

1,500 

625 


Third  Entry 

Surplus  and  Deficiency $5>755 

To  Profit  and  Loss 

To  close  Profit  and  Loss  account  into  Surplus 
and  Deficiency  account. 


$5,755 


514 


RECEIVERSHIP 


The  foregoing  entries  when  posted  result  in  the  follow- 
ing balance  sheet  as  of  September  i,  19 16, 

In  case  a  Surplus  and  Deficiency  account  is  not  kept, 
the  balance  should  be  closed  into  the  estate  account. 

§  417.     (3)   Receiver's  Statement  of  Condition 

Receiver's  Statement  of  Condition  of 
Willis  Grocery  Company 

(As  submitted  to  the  meeting  of  stockholders  and  creditors  at 
date  of  sale,  September  i,  1916.) 


Assets 

Liabilities 

Buildings    and    Prop- 

Secured Bank  Loans. 

$10,000.00 

erties  

$43,800.00 

Notes   Payable 

15,000.00 

Less  Mortgage  Out- 

Accounts   Payable 

91,460.00 

standing    

25,000.00 

Interest    Accrued 

Total    

625.00 

Equity  in  Property. 

$18,800.00 

$117,085.00 

Store   Exiuipment 

8,000.00 

Balance  of  Estate,  be- 

Delivery   Equipment.. 

8,000.00 

ing  excess  of  Assets 

Investments      ($12,000 

over  Liabilities 

107,695.00 

pledged)   

22,000.00 

Merchandise   

22,000.00 

Produce    

2,500.00 

Notes  Receivable 

5,200.00 

Accounts    Receivable . 

58,500.00 

Cash  on  Hand 

79,780.00 

Total    

Total    

$224,780.00 

$224,780.00 

It  is  apparent  from  the  above  statement  that  the  estate's 
deficit  is  $42,305  after  allowing  for  $150,000  of  outstand- 
ing capital.  In  other  words,  the  stockholders  have  $107,695 
of  their  capital  left. 

§  418.    (4)  Entries  for  Sale  and  Dissolution 

The  price  secured  for  the  business  is  slightly  more 
($2,305)  than  the  net  value  of  the  estate  as  shown  by  the 
receiver's  statement  of  condition.    As  a  going  concern,  how- 


RECEIVERSHIP   AND   SALE  cic 

ever,  there  is  a  good-will  element  which  has  not  been  stated 
in  the  balance  sheet. 

In  this  illustration  all  the  accounts  in  liquidation  are 
cleared  through  a  receiver's  realization  and  liquidation  ac- 
count as  shown  below.  A  further  use  of  this  account  is 
shown  in  Chapter  XXXVII,  "Dissolution  of  Corporations." 

All  transfers  of  properties  must  be  made  by  the  receiver 
and  properly  recorded  in  the  county  records.  After  trans- 
fer of  the  business  to  the  purchases,  the  balance  remaining 
would  belong  to  the  stockholders.  In  this  case  the  stock- 
holders did  not  desire  to  continue  a  losing  business  with 
impaired  capital;  they  therefore  dissolved  the  corporation 
and  directed  the  receiver  to  distribute  the  remaining  assets 
to  the  stockholders.  The  court  made  its  order  to  the  same 
effect,  and,  after  compliance  and  the  rendition  of  his  final 
accounting  to  the  court,  the  receiver  was  discharged. 

First  Entry  (For  transfer  of  assets  to  the  purchasers) 
September  i,  1916 

Realization  and  Liquidation  Account $199,780 

To  Sundry  Assets  (itemized) $199,780 

For  sale  and  transfer  of  assets,  as  per  re- 
ceiver's statement,  to  purchasers  of  the 
business,  by  resolution  of  the  stockhold- 
ers and  court  order.  (Mortgage  is  en- 
tered among  the  liabilities.) 

Cash  to  the  amount  of  $50,000  is  held  back  by  the  re- 
ceiver as  per  agreement.  At  the  proper  time  he  hands  this 
over  to  the  parties  in  interest. 

Second  Entry  (Transfer  of  liabilities  to  purchasers) 

Sundry  Liabilities    (itemized) $142,085 

To  Realization  and  Liquidation  Account  $142,085 

For  transfer  of  all  liabilities  (including 
mortgage)  to  the  purchasers,  by  court 
order. 


5i6 


RECEIVERSHIP 


Third  Entry  (Receipt  of  stock  from  purchasers) 

Stock  of  New  Company $60,000 

To  Realization  and  Liquidation  Account  $60,000 

Being  part  of  sale  price  agreed  upon  for 
the  business  as  a  going  concern,  the  cash 
and  stock  to  be  turned  over  to  the  stock- 
holders by  the  receiver. 

Fourth  Entry  (To  adjust  profit  on  sale  of  business) 

Realization  and  Liquidation  Account $2,305 

To  Surplus  and  Deficiency $2,305 

To  record  profit  realized  on  sale  of  busi- 
ness, this  amount  being  in  excess  of  the 
net  worth. 

Fifth   Entry    (Adjustment   of  capital   and  surplus   accounts   and 
distribution  of  proceeds) 

Capital  Stock $150,000 

To  Cash   $50,000 

"    Stock  of  New  Company 60,000 

"    Surplus  and  Deficiency 40,000 

For  distribution  of  cash  and  stock  among 
the  stockholders  in  proportion  to  their 
holdings,  each  receiving  eleven-fifteenths 
in  value  of  his  former  holdings;  and  for 
closing  capital  and  surplus  accounts. 

All  book  accounts  of  the  dissolving  company  are  now 
closed  out,  the  company's  charter  is  surrendered  by  due 
process,  and  the  receiver  discharged. 


CHAPTER  XXXVII 

DISSOLUTION    OF    CORPORATIONS 

§  419.    Voluntary  Dissolution 

In  most  of  the  states  a  corporation  may  be  dissolved  by 
its  stockholders,  the  procedure  being  simple;  and  while  in 
some  states  unanimous  consent  is  required,  in  others  two- 
thirds,  three-fourths,  or  even  a  bare  majority  is  enough  to 
terminate  the  corporate  existence. 

Many  of  the  smaller  corporations  end  their  existence 
informally  by  failure  to  pay  taxes  or  to  make  corporate 
reports,  in  consequence  of  which  the  state  forfeits  the 
charter  under  which  they  operate. 

In  case  of  voluntary  dissolution,  the  directors  are  the 
trustees  authorized  to  settle  the  company's  affairs,  and 
they  may  bring  this  about  in  the  simplest  manner  possible. 
The  chief  difficulty,  however,  lies  in  collecting  outstanding 
accounts,  and  in  disposing  of  properties  without  too  great 
sacrifice.  The  liquidation  of  liabilities  may  begin  at  once, 
or  as  rapidly  as  cash  is  received.  As  the  assets  are  sold, 
entries  are  made  through  the  cash  account ;  a  like  procedure 
being  required  also  for  cash  disbursements.  Losses  may 
be  closed  into  some  clearing  account  as  "Profit  and  Loss," 
"Deficiency,"  or  "Surplus" ;  and  this  in  turn,  as  a  final  step, 
is  closed  into  the  Capital  Stock  account.  There  is  nothing 
peculiar  about  closing  the  books  of  a  corporation  when  it  is 
dissolved,  and  any  accountant  or  bookkeeper  can  handle 
the  situation  without  trouble. 

§  420.    Dissolution  Through  Bankruptcy 

The  insolvency  or  bankruptcy  of  a  corporation  does  not 


5i8  DISSOLUTION   OF   CORPORATIONS 

necessarily  involve  dissolution.  Unless  formal  proceedings 
are  taken  to  dissolve  the  corporation,  it  will  survive  and 
may  be  again  used  as  a  business  organization.  As  there  is 
a  possibility  of  the  officers  and  stockholders  being  involved 
in  penalties  and  liabilities,  it  is  safer  to  go  through  a  formal 
dissolution. 

When  a  corporation  becomes  insolvent,  its  affairs  are 
usually  wound  up  by  bankruptcy  proceedings.  As  soon  as 
the  trustee  in  bankruptcy  is  appointed,  he  is  required  to 
make  an  inventory  and  appraisement  of  the  estate,  showing 
the  exact  condition  of  the  insolvent  corporation.  This  is 
known  as  a  "Statement  of  Affairs,"  and  is  made  in  the 
simplest  way  possible  for  the  convenience  of  both  court  and 
creditors.  With  the  statement  of  affairs  is  frequently  pre- 
sented a  "Deficiency  Account,"  showing  the  company's 
capital  impairment  and  how  such  impairment  or  deficit  of 
capital  came  about. 

A  statement  of  affairs  is  somewhat  similar  to  a  balance 
sheet.  It  is  prepared  from  the  books,  schedules,  creditors' 
claims,  etc.,  and  contains  on  one  side  all  liabilities,  dis- 
tinguishing between  those  which  are  unsecured,  partially 
secured,  or  fully  secured ;  the  preferred  claims  are  set  forth 
on  the  same  side  of  the  statement.  On  the  other  side,  the 
assets  of  the  concern  are  shown  at  their  nominal  or  book 
value,  and  also  at  the  value  which  they  are  expected  to 
realize.  Any  assets  which  have  been  given  or  pledged  as 
security  for  creditors'  claims  are  separated  from  those  which 
are  available  for  distribution  among  the  unsecured  creditors. 
The  difference  between  the  two  sides  of  the  statement  shows 
either  the  nominal  net  surplus  or  net  deficiency,  and  is 
transferred  to  a  special  account  known  as  the  "Deficiency" 
account.  Contingent  liabilities  should  also  be  shown  among 
the  liabilities  and  the  loss  expected  thereon  should  be 
indicated. 


DISSOLUTION   OF  CORPORATIONS 


519 


§421.    The  Deficiency  Account 

The  deficiency  account  shows  on  one  side  the  net  de- 
ficiency as  transferred  from  the  statement  of  affairs,  the 
capital  accounts,  and  the  profits  made  on  the  business  since 
its  commencement  or  since  a  date  when  the  books  show  it 
to  have  been  in  a  sound  condition.  On  the  other  side  are 
shown  the  losses  incurred  in  realizing  upon  the  assets,  any 
withdrawal  of  profits,  and  losses  not  otherwise  provided  for 
in  the  statement. 

The  object  of  the  deficiency  account  is  to  show  the 
amount  of  any  deficit  and  its  various  items.  It  shows  to 
what  extent  the  capital  has  been  impaired  or  how  far  the 
company  falls  short  of  being  solvent.  It  is  practically  a 
Profit  and  Loss  account,  but  is  opened  only  in  case  of  in- 
solvency proceedings.  The  deficiency  account  and  the 
items  with  which  it  is  debited  and  credited  are  as  fol- 
lows : 

Deficiency  Account 


Credit : 

With  capital  investment. 

With  surplus  profits  at  clos- 
ing of  previous  period. 

With  profit  on  trading. 

With  balance,  deficiency  per 
statement  of  affairs. 


Debit: 

With    dividends    paid. 

With  losses  through  failures 
as  per  Profit  and  Loss  account. 

With  shrinkage  in  assets  as 
per  statement  of  affairs. 

With  depreciation  of  ac- 
counts receivable. 

With  depreciation  of  mer- 
chandise. 

With  depreciation  of  fixtures, 
etc. 


§  422.    Realization  and  Liquidation  Account 

The  realization  and  liquidation  account  is  a  summary 
of  the  assets  to  be  realized  and  the  liabilities  to  be  liquidated, 
with  the  accompanying  entries  for  assets  actually  realized 


520 


DISSOLUTION   OF   CORPORATIONS 


and  for  liabilities  liquidated.  This  account,  or  statement, 
can  be  readily  understood  by  reference  to  the  accompanying 
illustration. 


Realization  and  Liquidation  Account 


Debit: 

With  assets  to  be  realized. 

With   liabihties   Hquidated. 

With  expenses  of  reahzation 
and  hquidation. 

With  supplementary  charges 
if  any. 


Credit  : 

With  liabilities  to  be  liqui- 
dated. 

With  proceeds  of  assets  real- 
ized. 

With  loss  due  to  liquidation, 
charged  to  Capital  account. 

With  supplementary  credits 
if  any. 


This  account  is  similar  to  that  of  the  receiver  or  trustee 
to  whom  is  given  the  duty  of  settling  the  company's  affairs. 
He  is  charged  with  all  the  assets  of  the  company  turned 
over  to  him,  and  credited  with  all  the  liabilities  assumed. 
He  is  then  in  turn  credited  for  all  cash  received  from 
realization  of  assets,  cash  being  debited;  and  he  is  debited 
for  all  liabilities  discharged,  since  they  cease  to  be  offsets 
to  the  assets  taken  in  tntst,  cash  at  the  same  time  being 
credited.  It  will  be  seen  that  the  trustee's  cash  account 
becomes  a  supplement  to  the  realization  and  liquidation 
account. 


§  423.    Statement  of  Condition 

The  Longworth  Store  Company  being  unable  to  meet 
its  obligations,  is  forced  into  bankruptcy  by  the  creditors. 
From  the  books,  from  the  schedules  of  the  company's  affairs, 
from  creditors'  proved  claims,  and  from  the  appraisements, 
the  following  statement  of  condition  has  been  ascertained 
as  of  May  i,  191 6,  by  the  trustee  in  bankruptcy: 


DISSOLUTION   OF  CORPORATIONS  52 1 

Cash  on  Hand $5,500.00 

Customers'  Accounts,  $1,000  good;  $600  doubtful,  but  esti- 
mated to  produce  $200 ;  $1,000  bad 2,600.00 

Property,  estimated  to  produce  $9,000 14,000.00 

Notes  Receivable,  good 4,250.00 

Securities,    $3,000   pledged   with   partially   secured    creditors; 

remainder  held  by  fully  secured  creditors 28,000.00 

Merchandise,  expected  to  bring  $15,000 24,650.00 

Dividends  paid  during  year,  25% 6,250.00 

Trade  Losses,  due  to  drop  in  price  of  goods 7,400.00 

Creditors  Unsecured 25,000.00 

Preferred  Claims — Wages,  Salaries,  and  Taxes 700.00 

Creditors  Partially  Secured 23,900.00 

Creditors  Fully  Secured 17,000  00 

Capital  Stock 25,000.00 

Surplus 1,050.00 

In  the  course  of  the  bankruptcy  proceedings  the  follow- 
ing accounting  exhibits  are  required : 

1.  A  statement  of  affairs,  showing  the  assets  and  the 

liabilities  with  respect  to  their  realization  and 
liquidation. 

2.  A  deficiency  account,  showing  such  of  the  above 

stated  particulars  as  would  account  for  the  de- 
ficiency exhibited  in  the  statement  of  affairs. 

3.  A    realization    and    liquidation    account,    showing 

settlement  of  the  estate. 

§  424.    (i)  Statement  of  Affairs 

The  trustee,  or  his  accountant,  prepares  the  statement 
of  affairs  from  information  gleaned  from  the  various 
sources  open  to  him,  and  submits  it,  together  with  the  com- 
plementary deficiency  account,  to  the  meeting  of  creditors. 
He  submits  also  his  inventory  and  appraisement  to  the 
court  for  record  in  the  court  journal.  It  is  apparent  that 
the  trustee  should  either  be  an  accountant  himself,  or  should 
engage  the  services  of  an  accountant  for  the  determination 


522  DISSOLUTION   OF  CORPORATIONS 

of  the  company's  condition  and  for  compiling  the  many 
various  details  that  will  be  found  necessary  in  preparing  his 
statements. 

A  trial  balance  is  compiled  as  a  preliminary  to  the  prepa- 
ration of  a  statement.  The  statement  of  affairs  and  the 
deficiency  account  which  follow  illustrate  the  manner  of 
setting  forth  the  information  called  for.  The  trustee's  cash 
account  is  a  simple  statement  of  receipts  and  payments.  All 
payments  are  to  be  supported  by  vouchers  which,  with  all 
other  records,  are  presented  for  the  official  audit  at  the 
proper  time.  Careful  minutes  are  kept  of  all  meetings  of 
creditors,  resolutions,  court  orders,  etc.,  in  order  that  a  full 
report  as  to  the  existing  conditions  may  be  prepared  when- 
ever required. 

The  directors  of  a  corporation  are  not  usually  liable  for 
the  debts  of  the  company,  but  in  the  case  illustrated  an 
interim  dividend  has  apparently  been  paid  out  of  capital 
and,  if  this  should  be  so,  the  amount  must  be  made  good  by 
the  directors. 

Trial  Balance,  May  i,  19 i6. 

Cash  $5,500.00 

Customers 2,600.00 

Property 14000.00 

Notes  Receivable 4,250.00 

Securities 28,000.00 

Merchandise 24,650.00 

Dividends   6,250.00 

Trade  Losses 7,400.00 

Creditors  Unsecured $25,000.00 

Creditors  Partially  Secured 23,900.00 

Creditors  Fully  Secured 17,000.00 

Wages,  Salaries,  Taxes 700.00 

Capital  Stock 25,000.00 

Surplus  from  Previous  Year 1,050.00 

$92,650.00    $92,650.00 


DISSOLUTION   OF   CORPORATIONS  523 

LoNGWORTH  Store  Company 

Statement  of  Affairs 
At  Date  of  Failure,  May  i,  1916 

Assets  Book       Estimated 
Value              to 

Realize 

Cash  on  Hand $5,500.00      $5,500.00 

Property  14,000.00        9,000.00 

Notes  Receivable,  good 4,250.00        4,250.00 

Customers : 

Good    1,000.00        1,000.00 

Doubtful   600.00          200.00 

Bad  1,000.00 

Merchandise 24,650.00      15,000.00 

Securities $28,000.00  28,000.00 

Pledged  with  Partially  Secured  Cred- 
itors,  per  contra 3,000.00 

$25,000.00 
Pledged  with  Fully  Secured  Creditors 

for  Debts  of  $17,000 25,000.00 

Surplus  of  Securities,  per  contra 8,000.00 

Total $79,000.00    $42,950.00 

Deduct  Preferred  Creditors,  per  contra 700.00 

Assets  Available  for  Dividends $42,250.00 

(Equivalent  to  a  dividend  of  92.07%  on  claims 
of  45,900,  exclusive  of  realization  expenses.) 
Balance,  Deficiency  per  Deficiency  account 3.650.00 

$45,900.00 


Liabilities 


Unsecured  Creditors: 
On  Book  Accounts. 


Gross        Expected 

Amount       to  Rank 

$25,000.00    $25,000.00 


524 


DISSOLUTION   OF   CORPORATIONS 


Fully  Secured  Creditors: 

On  Book  Accounts $17,000.00    17,000.00 

Estimated  Value  of  Securities 25,000.00 


Surplus,  to  contra. 


5,000.00 


Partially  Secured  Creditors : 

On  Book  Accounts $23,900.00    23,900.00 

Estimated  Value  of  Securities 3,000.00 


Preferred   Creditors : 
Wages,   Salaries,  Taxes,  deducted  from  assets 
per  contra 


700.00 


Total $66,600.00 

Liabilities  Due  to  Ranking  Creditors 


20,900.00 


$45,900.00 


§  425.    (2)  Deficiency  Account 

LoNGwoRTH  Store  Company 
Deficiency  Account 

At  Time  of  Failure,  May  i,  1916 
(Being  an  analysis  of  the  deficiency  as  shown  in  the  statement  of 
affairs.) 


Debits 

Credits 

Loss     from     Shrinkage 

Capital   Stock   Invested  $25,000.00 

in  Assets : 

Surplus     Profits     from 

Property    

$5,000.00 

Previous    Year 1,050.00 

Merchandise   

Customers'    Accounts 

9,650.00 
1,400.00 

Total    Credit $26,050.00 

Balance,  Deficiency,  per 

Total  Shrinkage. . . 

$16,050.00 

Statement  of  Affairs      3,650.00 

Interim  Dividends  Paid 

6,250.00 

Trade  Losses 

7,400.00 

$29,700.00 

$29,700.00 

Note:    It  will  be  seen  that  the  capital  and  surplus,  amounting  to 
$26,050,  have  been  wiped  out,  and  $3,650  of  the  assets  besides. 


DISSOLUTION   OF   CORPORATIONS 


525 


§  426.    Trustee's  Cash  Account 

The  activities  of  the  trustee  in  realizing-  upon  assets  and 
in  liquidating-  liabilities  are  set  forth  in  the  following 
cash  account.  Several  months  are  usually  required  for  the 
settlement  of  an  estate  in  bankruptcy,  and  during  that  period 
two  or  more  dividends  may  be  paid  to  creditors. 

First  and  Final  Account  of 
Alfred  S.  Dickinson,  Trustee  in  Bankruptcy 
FOR  THE  Estate  of  Longworth  Store  Company, 
Bankrupt 

December  i,  1916 

The  Trustee  Charges  Himself  with 

Cash  Taken  Over $5,500.00 

Proceeds  of  Sale  of  Property 9,000.00* 

Profit  on  Sale  of  Property '. 1,000.00 

Proceeds  of  Sale  of  Merchandise 15,000.00* 

Profit  on  Sale  of  Merchandise 1,000.00 

Amounts  Collected  from  Notes  Receivable 4,250.00 

Amounts  Collected  from  Customers 1,200.00 

Amounts  Collected  from  Customers  in  Excess  of  Estimate  50.00 
Proceeds   of    Sale   of   Pledged    Securities    (less   claims   of 

Secured  Creditors,  $20,000,  per  contra) 28,000.00 

Total    Debits $65,000.00 

The  Trustee  Takes  Credit  for 

Payment  of  Preferred  Claims $700.00 

First  Dividend  to  Unsecured  Creditors,  being  50%  on  $45,900  22,950.00 
Payment  to  Fully  Secured  Creditors  from  Sale  of  Pledged 

Securities,  per  contra 17,000.00 

Payment  of  Partially  Secured  Creditors,  or  Portion  secured 

from  Sale  of  Pledged  Securities,  per  contra 3,000.00 

Expenses  of  Administration  and  Commission  to  Trustee 2,50000 

Total    Credits $46,150.00 

Final  Dividend  of  41.07%  by  Order  of  Court 18,850.00 

Total  Payments $65,000.00 


These  are  the  amounts  as  per  Statement  of  AfEairs. 


526 


DISSOLUTION   OF   CORPORATIONS 


Summary 

Total  Receipts  of  Cash $65,000.00 

Total  Payments  to  Secured  and  Preferred  Cred- 
itors and  for  Expenses 23,200.00 

Total  Dividends  to  Creditors,  being  91.07% $41,800.00 


§  427.     (3)  The  Realization  and  Liquidation  Account 

As  previously  stated,  this  is  a  summary  of  the  trustee's 
records  in  selling  the  properties  and  collecting'  debts  due  to 
the  bankrupt  estate,  and  also  of  liabilities  paid  by  him.  In 
the  following  illustration  the  assets  and  liabilities  are  shown 
separately  for  greater  convenience  in  illustrating  the  divi- 
sions and  cancellations : 

Realization  and  Liquidation  Account 

Of  Longworth  Store  Company 

As  OF  December  i,  1916 

Account  of  Assets 


To  be  Realized : 

Realized  : 

Cash    (see  Cash   Ac- 

Property     

$10,000.00 

count) 

Merchandise    

16,000.00 

Property    

$9,000.00 

Securities    

28,000.00 

Merchandise     

15,000.00 

Notes    Receivable 

4,250.00 

Securities    

28,000.00 
4,250.00 

Customers'   Accounts 

1,250.00 

Notes    Receivable 

Customers'    Accounts 

1,200.00 

Total    

$57,450.00 

Supplementary    Charges 

: 

Increase  in  Value  of 

Property  over  Ap- 

praisement     

1,000.00 

Increase  in  Value  of 

Merchandise     over 

Appraisement    

1,000.00 

Customers'   Increase. 

50.00 

$59,500.00 

$59,500,00 

DISSOLUTION   OF  CORPORATIONS 
Account  of  Liabilities 


527 


Liquidated 

Preferred    Claims $700.00 

Secured    Creditors...     20,000.00 
First      Dividend      to 

Creditors    22,950.00 

Second    Dividend    to 

Creditors   18,850.00 


Total    $62,500.00 

Commissions  and  Ex- 
penses        2,500.00 

Balance,  Loss  to  Cred- 
itors, carried  to  Capi- 
tal Account 4,100.00 


$69,100.00 


To  be  Liquidated: 

Preferred   Claims. . , .  $700.00 

Secured    Creditors. . .  20,000.00 

Unsecured    Creditors  25,000.00 
Partially    Secured 

Creditors   20,900.00 


Total    $66,600.00 

Supplementary  Credits : 
Commission  and  Ex- 
pense of  Trustee..      2,500.00 


$69,100.00 


Trustee's  Cash  Account 


Receipts 

Amount  on  Hand $5,500.00 

Sale  of  Property 10,000.00 

Sale  of   Merchandise..  16,000.00 

Notes    Receivable 4,250.00 

Customers'    Accounts..  1,250.00 

Sale  of  Securities 28,000.00 


$65,00000 


Payments 

Preferred    Claims $700.00 

First  Dividend,  50%...  22,950.00 

Secured    Claims 17,00000 

Secured    Claims 3,000.00 

Expenses  and  Commis- 
sions    2,500.00 

Dividend,  41.07%  Final 

Settlement 18,850.00 


$65,000.00 


Note:    Vouchers  for  all  cash  disbursements  should  be  available. 


APPENDIX 

INCORPORATION    FORMS 

Form  I.    New  York  Charter 

Certificate  of  Incorporation 

OF  THE 

Hampton   TradixN'g   Corporation 

We,  the  undersigned,  all  being  of  full  age  and  two-thirds  being 
citizens  of  the  United  States  and  one  of  us  a  resident  of  the  State  of 
New  York,  for  the  purpose  of  forming  a  corporation  under  the  Busi- 
ness Corporations  Law  of  the  State  of  New  York,  do  hereby  certify 
and  set  forth : 

First.    The  name  of  said  corporation  shall  be: 
"Hampton  Trading  Corporation." 

Second.  The  purposes  for  which  said  corporation  is  to  be  formed 
are  as  follows : 

(a)  To  buy,  sell,  produce,  manufacture,  and  dispose  of  all 
kinds  of  goods,  wares,  foods,  potables,  drugs,  merchandise,  manu- 
factures, commodities,  furniture,  machinery,  agricultural  tools,  sup- 
plies and  products,  and  generally  to  engage  in  and  conduct  any 
form  of  manufacturing  or  mercantile  enterprise  not  contrary  to  law. 

(b)  To  lease,  buy,  sell,  use,  mortgage,  improve,  and  otherwise 
handle,  deal  in,  and  dispose  of  all  such  property,  real  and  personal, 
as  may  be  necessary  or  convenient  in  connection  with  the  aforesaid 
business  of  the  Company. 

(c)  To  conduct  and  transact  business  in  any  of  the  states, 
territories,  or  colonial  dependencies  of  the  United  States  and  in 
any  foreign  country  or  countries,  to  have  offices  therein,  and  to 
hold  real  and  personal  property  therein  without  limit,  subject  to 
the  local  law. 

Third.  The  amount  of  capital  stock  of  said  corporation  shall  be 
Two  Hundred  and  Fifty  Thousand  Dollars  ($250,000). 

The  amount  of  capital  with  which  said  corporation  will  begin 
business  is  Ten  Thousand  Dollars  ($10,000). 

Fourth.  The  number  of  shares  of  which  said  capital  stock  is  to 
consist  shall  be  Two  Thousand,  Five  Hundred  (2,500)  Shares  of  the 
par  value  of  One  Hundred  Dollars  ($100)  each. 


230  FORMS 

Fifth.  The  principal  business  office  of  said  corporation  shall  be 
located  in  the  Borough  of  Manhattan  and  in  the  City,  County,  and 
State  of  New  ^ork. 

Sixth.    The  duration  of  said  corporation  shall  be  perpetual. 

Seventh.  The  number  of  directors  of  said  corporation  shall  be 
five. 

Eighth.  The  names  and  post-office  addresses  of  the  directors  of 
said  corporation  for  the  first  year  are  as  follows : 

Names  Addresses 

Charles  W.  Hampton,  167-169  Center  St.,  New  York  City 
Samuel  Johnson,  "  " 

James  J.  Miller, 

Lincoln  Webster,  735  Main  St.,  Albany,  New  York 

Robert  W.  Kester, 

Ninth.  The  names  and  post-office  addresses  of  the  subscribers  to 
this  certificate,  and  the  number  of  shares  which  each  agrees  to  take  in 
said  corporation  are  as  follows : 

Names                                        Addresses  Shares 

Charles    W.    Hampton,  167-169    Center    St.,    New  York  City,    1,250 

Samuel  Johnson,                                 "                                 "  500 

James  J.  Miller,                                  "                                 "  500 

Tenth.  At  all  elections  of  directors  of  this  corporation,  each 
stockholder  shall  be  entitled  to  as  many  votes  as  shall  equal  the  number 
of  his  shares  of  stock,  multiplied  by  the  number  of  directors  to  be 
elected,  and  he  may  cast  all  of  such  votes  for  a  single  director  or  may 
distribute  them  among  the  number  to  be  voted  for,  or  any  two  or 
more  of  them,  as  he  may  see  fit. 

In  Witness  Whereof,  we  have  made  and  signed  this  certificate  in 
duplicate  this  sth  day  of  June,  1916. 

Charles  W.  Hampton 
Samuel  Johnson 
James  J.  Miller 
State  of  New  York    "1 

rSS  * 

County  of  New  York  J 

Personally  appeared  before  me  this  5th  day  of  June,  1916,  Charles 
W.  Hampton,  Samuel  Johnson,  and  James  J.  Miller,  to  me  personally 
known  to  be  the  persons  described  in  and  who  executed  the  foregoing 
certificate  and  severally  acknowledged  that  they  executed  the  same  for 
the  purposes  set  forth.  j^^^^^  Burrell, 

Tnotarial  "l  Notary  Public  for 

\     seal    J  New  York  County 


FORMS  531 


Form  2.    By-Laws* 


By-Laws 

OF  THE 

Hampton  Trading  Corporation 
New  Yo&k 

Article  I — Stock 

t.  Certificates  of  Stock  shall  be  issued  in  numerical  order  from 
the  stock  .certificate  book,  be  signed  by  the  President  and  Treasurer, 
and  be  sealed  by  the  Secretary  with  the  corporation  seal.  A  record  of 
each  certificate  issued  shall  be  kept  on  the  stub  thereof, 

2.  Transfers  of  Stock  shall  be  made  only  upon  the  books  of  the 
Company  by  the  holder  thereof  in  person,  or  by  his  duly  authorized 
attorney.  The  stock  books  of  the  Company  shall  be  closed  to  transfers 
twenty  days  before  general  elections  and  ten  days  before  dividend 
days. 

3.  The  Treasury  Stock  of  the  Company  shall  consist  of  such 
issued  and  outstanding  stock  of  the  Company  as  may  be  donated  to  the 
Company  or  otherwise  acquired,  and  shall  be  held  subject  to  disposal 
by  the  Board  of  Directors.  Such  stock  shall  neither  vote  nor  participate 
in  dividends  while  held  by  the  Company. 

Article  II — Stockholders 

1.  The  Annual  Meeting  of  the  stockholders  shall  be  held  in  the 
principal  office  of  the  Company  in  New  York  City,  on  the  fourth 
Saturday  of  December  of  each  year,  at  eleven  o'clock  a.m.,  if  not  a 
legal  holiday;  but  if  a  legal  holiday,  then  on  the  following  Monday. 

2.  Special  Meetings  of  the  stockholders  may  be  called  at  the 
principal  office  of  the  Company  at  any  time,  by  resolution  of  the  Board 
of  Directors,  or  upon  written  request  of  the  stockholders  holding  one- 
third  of  the  outstanding  stock. 

3.  Notice  of  Meetings,  written  or  printed,  for  every  regular  or 
special  meeting  of  the  stockholders,  shall  be  prepared  and  mailed  to 
the  last-known  post-office  address  of  each  stockholder,  not  less  than 
ten  days  before  any  such  meeting,  and  if  a  special  meeting,  such  notice 
shall  state  the  object  or  objects  thereof. 

4  A  Quorum  at  any  meeting  of  the  stockholders  shall  consist  of 
a  majority  of  the  voting  stock  of  the  Company,  represented  in  person 
or  by  proxy.  A  majority  of  such  quorum  shall  decide  any  question 
that  may  come  before  the  meeting. 


•See  Conyngton's  "Corporate  Organization." 


eo2  FORMS 

5.  The  Election  of  Directors  shall  be  held  at  the  annual  meeting 
of  the  stockholders.  The  election  shall  be  by  ballot  and  each  stock- 
holder of  record  shall  be  entitled  to  cast  five  votes  for  each  share  of 
stock  held  by  him,  and  such  votes  may  be  cast  all  for  one  director 
or  be  distributed  among  the  number  to  be  elected,  in  any  manner  the 
voting  stockholder  may  desire. 

6.  The  Order  of  Business  at  annual  meetings  and,  as  far  as  it 
applies,  at  all  other  meetings  of  the  stockholders,  shall  be; 

1.  Calling  of  roll 

2.  Proof  of  due  notice  of  meeting 

3.  Reading  and  disposal  of  any  unapproved  minutes 

4.  Annual  reports  of  officers  and  committees 

5.  Election  of  directors 

6.  Unfinished  business 

7.  New  business 

8.  Adjournment 

Article  III — Directors 

1.  The  Business  and  Property  of  the  Company  shall  be  managed 
by  a  Board  of  five  Directors,  who  shall  be  stockholders  and  who  shall 
be  elected  annually  by  the  stockholders  for  the  term  of  one  year,  and 
shall  serve  until  the  election  and  acceptance  of  duly  qualified  suc- 
cessors. Any  vacancies  may  be  filled  by  the  Board  for  the  unexpired 
term. 

2.  A  regular  Meeting  of  the  Board  of  Directors  shall  be  held  in 
the  principal  office  of  the  Company  in  New  York  City,  on  the  last 
Saturday  of  each  month,  at  12  noon,  if  not  a  legal  holiday;  but  if  a 
legal  holiday,  then  on  the  following  Monday. 

3.  Special  Meetings  of  the  Board  of  Directors,  to  be  held  in  the 
principal  office  of  the  Company  in  New  York  City,  may  be  called  at 
any  time  by  the  President,  or  by  unanimous  written  consent  of  all 
the  members,  or  by  the  presence  of  all  members  at  such  meetings. 

4.  Notices  of  both  regular  and  special  meetings  shall  be  mailed 
by  the  Secretary  to  each  member  of  the  Board  not  less  than  five  days 
before  any  such  meeting,  and  notices  of  special  meetings  shall  state 
the  purposes  thereof. 

5.  A  Quorum  at  any  meeting  shall  consist  of  the  majority  of  the 
entire  membership  of  the  Board. 

6.  Officers  of  the  Company  shall  be  elected  by  ballot  of  Directors 
at  the  first  meeting  after  the  election  of  Directors  each  yAr.  Vacancies 
on  the  Board  shall  be  filled  for  the  unexpired  term.  The  Board  of 
Directors  shall  fix  the  compensation  of  the  officers  and  agents  of  the 
Company. 


FORMS 


533 


7.  The  Order  of  Business  at  any  regular  or  special  meeting  of  the 
Board  of  Directors  shall  be : 

1.  Reading  and  disposal  of  any  unapproved  minutes 

2.  Reports  of  officers  and  committees 

3.  Unfinished  business 

4.  New  business 

5.  Adjournment 

Article  IV — Officers 

1.  The  Officers  of  the  Company  shall  be  a  President,  a  Vice- 
Pi  esident,  a  Secretary,  and  a  Treasurer,  who  shall  be  elected  for  one 
year,  and  shall  hold  office  until  their  successors  are  elected  and  qualified. 
The  positions  of  Secretary  and  Treasurer  may  be  united  in  one  person. 

2.  The  President  shall  preside  at  all  meetings,  shall  have  general 
supervision  of  the  affairs  of  the  Company,  shall  sign  or  countersign 
all  certificates,  contracts,  and  other  instruments  of  the  Company,  as 
authorized  by  the  Board  of  Directors;  shall  make  reports  to  the 
Directors  and  stockholders,  and  perform  all  such  duties  as  are  incident 
to  his  office  or  are  properly  required  of  him  by  the  Board  of  Directors. 
In  the  absence  or  disability  of  the  President,  the  Vice-President  shall 
exercise  all  his  functions. 

3.  The  Secretary  shall  issue  notices  for  all  meetings,  shall  keep 
their  minutes,  shall  have  charge  of  the  seal  and  the  corporate  books ; 
shall  sign,  with  the  President,  such  instruments  as  shall  require  such 
signature,  and  shall  make  such  reports  and  perform  such  other  duties 
as  are  incident  to  his  office,  or  are  properly  required  of  him  by  the 
Board  of  Directors, 

4.  The  Treasurer  shall  have  the  custody  of  all  moneys  and  securi- 
ties of  the  Company,  and  shall  keep  regular  books  of  account  and 
balance  the  same  each  month.  He  shall  sign  or  countersign  such 
instruments  as  require  his  signature,  shall  perform  all  duties  of  his 
office  or  that  are  properly  required  of  him  by  the  Board,  and  shall 
give  bond  for  the  faithful  performance  of  his  duties  in  such  sum  and 
with  such  sureties  as  may  be  required  by  the  Board  of  Directors. 

Article  V — Dividends  and  Finances 

1.  Dividends  shall  be  declared  only  from  the  surplus  profits,  at 
such  times  as  the  Board  of  Directors  shall  direct;  and  no  dividends 
shall  be  declared  that  will  impair  the  capital  of  the  Company. 

2.  The  Moneys  of  the  Company  shall  be  deposited  in  the  name  of 
the  Company,  in  such  bank  or  trust  company  as  the  Board  of  Directors 
shall  designate,  and  shall  be  drawn  out  only  by  check  signed  by  the 
Treasurer  and  countersigned  by  the  President 


534 


FORMS 


Article  VI — Seal 


I.  The  Corporate  Seal  of  the  Company  shall  consist  of  two  con> 
centric  circles,  between  which  is  the  name  of  the  Company,  and  in  the 
center  shall  be  inscribed  "Incorporated  1916,  New  York,"  and  such 
seal,  as  impressed  on  the  margin  hereof,  is  hereby  adopted  as  the 
corporate  seal  of  the  Company. 

Article  VII — Amendments 

1.  These  By-Laws  may  be  amended,  repealed,  or  altered,  in 
whole  or  in  part,  by  a  three-fifths  vote  of  the  entire  outstanding  stock 
of  the  Company,  at  any  regular  meeting  of  the  stockholders,  or  at  any 
special  meeting" where  such  action  has  been  announced  in  the  call  and 
notice  of  such  meeting. 

2.  The  Board  of  Directors  may  adopt  additional  by-laws  in 
harmony  therewith,  but  shall  not  alter  nor  repeal  any  by-laws  adopted 
by  the  stockholders  of  the  Company. 

Form  3.    Certification  of  By-Laws 

We,  the  undersigned,  Charles  W.  Hampton  and  Samuel  Johnson, 
respectively  the  duly  elected  President  and  Secretary  of  the  Hampton 
Trading  Corporation,  a  corporation  organized  under  the  laws  of  the 
State  of  New  York,  do  hereby  certify  that  the  foregoing  By-laws 
are  the  By-laws  of  the  said  corporation,  duly  adopted  by  the  stock- 
holders of  said  corporation  at  their  first  meeting  held  on  the  9th  day 
oc  June,  1916,  in  the  office  of  the  said  corporation,  167-169  Center 
Street,  New  York  City,  as  shown  by  the  minutes  of  said  meeting. 

In  Testimony  Whereof,  we  have  hereunto  affixed  our  official 
signatures  and  the  corporate  seal  of  said  corporation,  this  9th 
day  of  June,  1916.  Samuel  Johnson, 

Jcorporate'i  Secretary 

\      seal      J 

Charles  W,  Hampton, 

President 

Form  4.    Minutes  of  First  Meeting  of  Stockholders 

Hampton    Trading   Corporation 

Minutes  of  First  Meeting  of  Stockholders 

Held  June  9,  1916 

Pursuant  to  written  call  and  waiver  of  notice  signed  by  all  the 

incorporators,  the  first  meeting  of  the  Hampton  Trading  Corporation 


FORMS 


535 


was  held  in  its  principal  office,  167-169  Center  Street,  New  York  City, 
at  4  P.M.  on  the  9th  day  of  June,  1916. 

Mr.  Charles  W.  Hampton  called  the  meeting  to  order,  and  by 
motion  unanimously  carried  was  appointed  Chairman.  Mr.  Samuel 
Johnson  was  appointed  Secretary, 

There  were  present  in  person:  Charles  W.  Hampton  and  Samuel 
Johnson. 

James  J.  Miller's  proxy  was  presented  by  Charles  W.  Hampton 
and  was  ordered  filed  with  the  Secretary. 

The  Secretary  presented  and  read  the  call  and  waiver  pursuant 
to  which  the  rreeting  was  held.  On  motion  it  was  ordered  to  be 
entered  in  the  minute  book  following  the  minutes  of  the  meeting. 

The  Chairman  then  presented  a  copy  of  the  Certificate  of  In- 
corporation and  stated  that  the  original  had  been  filed  with  the 
Secretary  of  State  on  the  6th  day  of  June,  1916,  and  that  a  duplicate 
copy  had  beeen  filed  for  record  with  the  County  Clerk  on  the  8th  day 
of  June,  1916. 

Upon  motion  duly  made  and  carried,  said  Certificate  of  Incorpora- 
tion was  ordered  received,  the  Directors  named  therein  were  recognized 
as  the  Directors  of  the  Company,  and  the  Secretary  was  instructed  to 
spread  the  said  Certificate  in  full  upon  the  first  pages  of  the  book 
of  minutes. 

The  Chairman  presented  a  form  of  By-laws  prepared  by  Counsel 
for  the  Company,  which  was  read,  article  by  article,  and  as  a  whole 
unanimously  adopted  and  ordered  to  be  entered  in  the  book  of  minutes 
immediately  following  the  Certificate  of  Incorporation- 

The  Secretary  then  presented  a  written  proposal  from  Charles  W. 
Hampton,  of  167-169  Center  Street,  New  York  City,  offering  to  transfer 
and  assign  to  the  Company  his  entire  plant  and  business,  comprising 
all  of  his  assets  and  liabilities  in  exchange  for  One  Thousand.  Two 
Hundred  and  Fifty  (1,250)  Shares  of  the  capital  stock  of  the  Company. 

After  due  consideration,  the  Hampton  proposal  was  ordered  re- 
ceived and  the  following  resolution  in  regard  thereto  was  moved, 
seconded,  and  passed  by  unanimous  vote: 

Whereas,  a  proposition  has  been  received  from  Charles  W. 
Hampton,  offering  to  sell,  assign,  and  convey  to  this  Company 
the  plant,  property,  all  assets  and  liabilities,  and  all  of  his  estab- 
lished mercantile  business,  as  a  going  concern,  in  exchange  for 
One  Thousand,  Two  Hundred  and  Fifty  (1,250)  Shares  of  stock  in 
this  Company;  and 

Whereas,  it  appears  to  the  stockholders  of  this  Company  that 
the  said  property  and  business  are  desirable  for  the  purposes  of 
the  Company  and  are  reasonably  worth  the  purchase  price  thereof : 


536 


FORMS 


Now,  Therefore,  Be  It  Resolved,  that  the  said  propo.sal  for 
the  exchange  of  said  business,  property,  assets  and  Habilities  for 
One  Thousand,  Two  Hundred  and  Fifty  (1,250)  Shares  of  the 
capital  stock  of  this  Company,  as  set  forth  in  said  proposal,  be 
and  hereby  is  approved,  and  the  Directors  of  this  Company  are 
hereby  authorized,  empowered,  and  instructed  to  accept  the  said 
proposal,  and  to  issue  One  Thousand,  Two  Hundred  and  Fifty 
(1,250)  Shares  of  stock  of  the  Company  for  the  said  property  and 
business  in  accordance  with  the  terms. 

There  being  no  further  business,  the  meeting  was  declared  ad- 
journed. 

Samuel  Johnson, 

Secretary 
Charu:s  W.  Hampton, 

Chairman 

Form  5.    Proxy — First  Stockholders'  Meeting 

Proxy 

FOR 

First  Meeting  of  Stockholders 

Know  All  Men  By  These  Presents,  that  I,  the  undersigned,  one 
of  the  incorporators  of  the  Hampton  Trading  Corporation  and  a  sub- 
scriber to  the  stock  thereof,  do  hereby  constitute  and  appoint  Charles 
W.  Hampton  my  true  and  lawful  attorney,  with  full  powers  of  sub- 
stitution and  revocation,  to  represent  me  at  the  first  meeting  of  the 
stockholders  of  said  corporation,  to  be  held  on  the  9th  day  of  June, 
1916,  and  at  any  meeting  postponed  or  adjourned  therefrom,  hereby 
granting  my  said  attorney  full  power  and  authority  to  act  for  me  at 
said  meeting,  and  in  my  name,  place,  and  stead  to  vote  thereat  upon 
the  stock  of  said  corporation  subscribed  for  by  me,  or  upon  which  I 
may  then  be  entitled  to  vote,  in  the  transaction  of  any  and  all  busi- 
ness pertaining  to  the  affairs  of  the  Company  that  may  be  brought 
before  said  meeting,  all  as  fully  as  I  might  or  could  do  if  personally 
present,  and  I  hereby  ratify  and  confirm  all  that  my  said  attorney, 
or  his  substitute,  shall  lawfully  do  at  such  meeting  in  my  name,  place, 
and  stead. 

In  Witness  Whereof,  I  have  hereunto  affixed  my  signature  this 
9th  day  of  June,  1916. 

James  J.  Miller  [l.  s.] 
In  presence  of 

Walter  H.  King 


\ 


FORMS  ^27 

Form  6.     Call  and  Waiver  of  Notice — First  Meeting  of 
Stockholders 

Call  and  Waiver  of  Notice 

FOR 

First    Meeting   of    Stockholdetis 

We,  the  undersigned,  being  all  of  the  incorporators  of  the  Hamp- 
ton Trading  Corporation,  and  all  the  subscribers  to  its  capital  stock 
entitled  to  notice  of  said  meeting,  do  hereby  call  the  first  meeting  of 
the  stockholders  of  said  corporation,  to  be  held  in  the  principal  office 
of  the  Company,  167-169  Center  Street,  New  York  City,  at  4  p.m.  on 
the  9th  day  of  June,  1916,  for  the  purpose  of  receiving  the  charter, 
adopting  by-laws,  considering  and  acting  upon  a  proposal  for  the  issue 
of  One  Thousand,  Two  Hundred  and  Fifty  (1,250)  Shares  of  the 
capital  stock  of  the  corporation  in  exchange  for  property,  and  the 
transaction  of  all  such  other  business  as  may  be  necessary  or  convenient 
in  connection  with  the  organization  of  said  corporation,  and  we  do 
hereby  waive  all  requirements  as  to  notice  or  publication  of  the  time, 
place,  and  purposes  of  this  first  meeting  and  do  consent  to  the  trans- 
action thereat  of  any  and  all  business  pertaining  to  the  affairs  of  the 
Company. 

Dated,  New  York  City.  Charles  W.  Hampton 

June  9,  1916.  Samuel  Johnson 

Jambs  J.  Miller 

Form  7.    Minutes  of  First  Meeting  of  Directors 
Hampton  Trading  Corporation 
Minutes  of  First  Meeting  of  Directors 
Held  June  9,  1916 
Pursuant   to   written   call    and   waiver   of   notice,    the   Board   of 
Directors  of  the  Hampton  Trading  Corporation  held  its  first  meeting 
in  its  principal  office  at  167-169  Center  Street,  New  York  Citj^  at  5  p.m. 
on  the  9th  day  of  June,  1916. 

Mr.   Charles  W.   Hampton  called  the  meeting  to  order,  and  on 
motion  was  elected  temporary  Chairman.     Mr.  Samuel  Johnson  was 
appointed  Secretary  pro  tern. 
There  were  present: 

Charles  W.  Hampton 
Samuel  Johnson 
James  J.  Miller 
Lincoln  Webster 
Robert  W.  Kester 


'538 


FORMS 


The  Secretary  presented  the  call  and  waiver  of  notice,  pursuant  to 
which  the  meeting  was  held,  duly  signed  by  all  the  Directors.  It  was 
ordered  spread  upon  the  minute  book  immediately  following  the 
minutes  of  the  meeting. 

The  Chairman  then  presented  a  form  of  By-laws  adopted  by  the 
stockholders  at  their  first  meeting,  and  stated  that  the  next  order  of 
business  as  set  forth  therein  was  the  election  of  a  President,  Vice- 
President,  Secretary,  and  Treasurer,  to  serve  for  the  ensuing  cor- 
porate year  and  until  the  election  and  acceptance  of  their  successors. 
The  following  officers  were  then  elected  by  unanimous  vote: 

President Charles  W.  Hampton 

Vice-President Lincoln  Webster 

Secretary Samuel  Johnson 

Treasurer James  J.  Miller 

The  permanent  officers  of  the  Company  then  took  charge  of  the 
meeting. 

By  motion,  duly  seconded  and  passed,  the  amount  of  the  Treas- 
urer's bond  was  fixed  at  Three  Thousand  Dollars  ($3,000),  such  bond 
to  be  in  form  and  with  sureties  approved  by  the  Board. 

The  Treasurer-elect  then  presented  a  bond  for  said  amount, 
signed  by  himself  as  principal,  and  by  the  Fidelity  Guarantee  Company 
of  New  York  City  as  sureties.  The  form  of  the  instrument  and  the 
sureties  thereon  meeting  with  the  approval  of  the  Board,  the  bond  as 
presented  was  formally  accepted  and  placed  in  custody  of  the  President. 

The  Secretary  then  presented  a  form  of  stock  certificate  for 
approval,  which  was  by  motion  adopted  as  the  stock  certificate  of  the 
Company;  and  the  Secretary  was  instructed  to  spread  the  said  form 
upon  the  pages  of  the  minute  book  immediately  following  the  record 
01  the  meeting. 

The  President  then  presented  a  written  proposal  from  Charles  W. 
Hampton,  of  167-169  Center  Street,  New  York  City,  offering  to  assign 
to  the  Company  in  exchange  for  One  Thousand,  Two  Hundred  and 
Fifty  (1,250)  Shares  of  stock,  the  assets  and  liabilities  shown  on  the 
accompanying  balance  sheet,  estimated  to  be  worth  One  Hundred  and 
Twenty-Five  Thousand  Dollars  ($125,000).  The  said  proposal  was 
ordered  spread  in  full  upon  the  minutes,  and  is  as  follows : 

{Here  should  be  recorded  the  proposal  for  the  exchange  of  property 
for  stock  and  the  balance  sheet  which  accompanies  it.) 

The  President  then  presented  the  resolution  of  the  stockholders, 
approving  of  said  proposition,  and  authorizing  and  instructing  the 
Directors  to  accept  the  same  and  to  take  such  action  in  regard  thereto 
as  might  be  necessary  to  make  such  acceptance  fully  effective. 


FORMS  e^Q 

The  President  then  called  the  Vice-president  to  the  chair  and  with- 
drew during  the  discussion  and  vote  upon  the  proposal. 

The  following  resolution  was  thereupon  moved,  seconded,  and 
after  due  discussion  was  unanimously  adopted: 

Whereas,  the  property  offered  in  exchange  for  One  Thousand, 
Two  Hundred  and  Fifty  (1,250)  Shares  of  the  capital  stock  of 
this  Company  by  Charles  W.  Hampton,  in  his  proposition  to  the 
Company,  is  adjudged  by  this  Board  to  be  of  the  reasonable  value 
of  One  Hundred  and  Twenty-Five  Thousand  Dollars  ($125,000) 
and  to  be  necessary  for  the  use  and  lawful  purposes  of  the 
Company ; 

Resolved,  that  the  said  property  be  received,  and  that  this 
Board  of  Directors  hereby,  in  accordance  with  the  authorizations 
and  instructions  of  the  stockholders  of  this  Company,  accept  the 
same  in  full  payment  for  the  said  One  Thousand,  Two  Hundred 
and  Fifty  (1,250)  Shares  of  the  capital  stock  of  the  Company,  in 
accordance  with  the  terms  of  said  proposal ;  and  the  proper  officers 
of  this  Company  be  hereby  authorized  and  directed  to  receive  the 
duly  executed  transfers  and  assignments  of  the  property  and  busi- 
ness specified  in  said  proposal,  and  to  issue  in  exchange  therefor 
One  Thousand,  Two  Hundred  and  Fifty  (1,250)  Shares  of  stock 
of  the  Company,  all  full-paid  and  non-assessable,  to  such  person 
or  persons  as  may  be  designated  by  the  written  order  of  the 
aforementioned  Charles  W.  Hampton. 

The  President  was  recalled  to  the  room  and  resumed  the  chair. 
Upon   motion   duly   made,   seconded,    and   passed,   the    following 
resolution  was  adopted. 

Resolved,  that  the  Treasurer  be  and  hereby  is  authorized  and 
instructed  to  open  an  account  for  the  Company  with  the  Seaboard 
National  Bank,  of  New  York  City,  and  to  deposit  therein  all  the 
funds  of  the  Company  coming  into  his  custody;  such  account  to 
be  in  the  name  of  the  Company  and  funds  deposited  therein  to  be 
withdrawn  only  by  check  signed  by  the  Treasurer  and  counter- 
signed by  the  President. 

The  following  motions  were  then  made,  seconded,  and  duly  passed 
by  the  unanimous  vote  of  all  present: 

Moved,  that  the  office  of  Charles  W.  Hampton  at  167-169  Center 
Street,  New  York  City,  as  acquired  by  the  Company,  be  and  hereby 
is  designated  as  the  principal  office  of  the  Company  within  the 
State  of  New  York. 


540  FORMS 

Moved,  that  the  Secretary  be  hereby  instructed  to  purchase  all 
such  record,  stock  and  transfer  books,  and  all  such  books  of 
account  and  stationery  and  office  supplies,  as  may  be  necessary  for 
the  proper  operation  and  record  of  the  Company's  business. 

Moved,  that  the  Treasurer  be  and  hereby  is  authorized  and 
directed  to  pay  out  of  the  funds  of  the  Company  the  sum  of 
Five  Hundred  Dollars  ($500)  or  so  much  of  it  as  may  be  necessary 
to  defray  the  cost  of  incorporation  of  the  Company  and  the 
expenses  incident  thereto. 

Moved,  that  Lincoln  Webster,  Samuel  Johnson,  and  James  J. 
Miller  be  hereby  appointed  inspectors  of  election  to  serve  at  the 
first  annual  election  of  Directors  of  the  Company,  and  at  any 
election  of  Directors  by  the  stockholders  previous  thereto. 

There  being  no   further  business  for  consideration,  the  meeting 
was  adjourned. 

Samuel  Johnson, 

Secretary 
Charles  W.  Hampton, 

President 


Pursuant  to  the  instructions  of  the  preceding  minutes,  the  following 
instruments  are  hereunto  appended  in  the  order  given: 

1,  Call  and  waiver  of  notice 

2.  Form  of  stock  certificate 

Form  8.     Call  and  Waiver  of  Notice — First  Meeting  of 
Directors 

Call  and  Waiver  of  Notice 

FOR 

First  Meeting  of  Directors 

We,  the  undersigned,  being  all  the  Directors  of  the  Hampton  Trad- 
ing Corporation,  do  hereby  call  the  first  meeting  of  said  Directors  to 
be  held  in  the  office  of  the  Company  at  167-169  Center  Street,  New 
York  City,  at  5  p.m.  on  the  9th  day  of  June,  1916,  for  the  purpose  of 
electing  officers  of  the  Company,  acting  upon  a  proposition  for  the 
issue  of  One  Thousand,  Two  Hundred  and  Fifty  (1,250)  Shares  of 
the  capital  stock  of  the  Company  in  exchange  for  property,  and  the 
transaction  of  all  such  other  business  as  may  be  necessary  or  desirable 


FORMS  541 

in  connection  with  the  organization  of  the  Company  and  the  promotion 
of  its  business,  and  we  hereby  waive  all  statutory  and  by-law  require- 
ments as  to  notice  of  time,  place,  and  object  of  this  first  meeting,  and 
consent  to  the  transaction  thereat  of  any  and  all  business  pertaining  to 
the  affairs  of  the  Company. 

Chakles  W.  Hampton 
New  York  City,  Samuel  Johnson 

June  9th,  1916.  James  J.  Miller 

Lincoln  Webster 
Robert  W.  Kester 

Note  :  For  general  form  of  stock  certificate,  see  Chapter  V. 


INDEX 


Accident  reserves,  333,  334 
Accountant,  duty  of,  165 
Accounting,        (.See     also     "Ac- 
counts," and  "Statements") 
closing  of  books,  320-337 
entries, 
bonds     (See  "Bonds") 
capital  stock  donated,  119,  120, 

121,  122 
capital    stock,    original   issue, 

101-118 
capital  stock  sold  above  par, 

114 
capital  stock  sold  below  par, 

112,  113,  114 
cash,  165,  170 
dividends,  loi 
entries,  closing, 
manufacturing   ousiness,  360- 

362 
trading  business,  370-373 
entries,   opening,    162,    167,   168, 
172,  173,  186-191 
capital  stock  sold  after  organ- 
ization, III,  112 
stock  full  paid,  103,  104,  105, 

106 
stock  on  instalments,  106,  107, 
108,  109 
ledger  accounts,  stock  on  instal- 
ments, 109,  no.  III 
methods,     statistics     frequently 

govern,  45 
profits,  method  of  entering,  loi 
pro  forma  statement,  103 
Accounts,      (See   also   "Account- 
ing") 
accrued  interest  on  bonds,  97 
bond  discount,  96 
bond  premium,  95,  96 


bondo,  95 

bonus,  125 

books  of     (See  "Books") 

capital  stock  authorized,  82,  85 

capital  stock,  common,  80,  81 

capital  stock,  preferred,  81 

capital  stock  subscribed,  85 

capital  stock  without  par  value, 
89,  90,  91 

distinctive  corporate,  80-100 

dividends,  94,  95 

donation,  87 

good-will,  99,  100 

instalment,  86 

interest  on  bonds,  97 

interest  on  mortgages,  97 

investments,  100,  128 

ledger,    170,    171 

organization  expenses,  92 

premium  on  capital  stock,  88 

reserve,  permanent,  99 

sinking  fund,  98 

sinking  fund  reserve,  98,  99 

stock  discount,  88,  113 

subscriptions  to  stock,  84 

surplus,  93,  94 

surplus  or  unappropriated  prof- 
its, 92 

treasury  stock,  87 

unissued  stock,  81,  82,  83 
Accruals,  closing  of  books,  321 
Accrued    interest    on    bonds    ac- 
count, 97 
Adjustment  bond,  218 
Agricultural  organizations, 

tax  (.federal)  exempt,  387 
Allotment  of  capital  stock,  183 
American  Telegraph  &  Telephone 
Co., 

bonds,  convertible,  213 


543 


544 


INDEX 


Amortization, 
organization  expenses,  92 
profit  on  sale  of  capital  stock, 
88 
Annual  meeting     (See  "Meetings, 

annual") 
Assessment      (See   "Taxes") 
Assets,  ( See  also  "Balancesheets"  ) 
contingent, 

closing  of  books,  322 
deferred, 
bond  discount,  96 
bonus  account,  125 
organization  expenses,  92 
fixed, 

good-will,  99,   100 
inflation  of  values,  94 
hidden     (See  "Reserves") 
intangible,   capital   stock   issued 

for,  24 
reserves    negatives    to,    or    de- 
ductions from,  331 
Assignment, 

capital  stock  certificate,  64 
subscriptions  and  instalments,  57 
Attorney,  duty  of,  165 

B 

Balance  sheets,  339-343 
capital  stock, 
common,  par  value  not  given, 

90,  91 
cumulative  preferred  stock,  90 
consolidated,  456-468 
deficit,    method    of    showing, 

462 

holding  company,  452,  453,  458, 

460,  461,  464,  465 

incorporation     of     partnerships 

(Illinois),  185,  186,  195,  196 

manufacturing  corporation,  356, 

357 
proprietorship,  changing  to  cor^ 
poratipn,  158 


reorganization    of    corporation, 
471,  472,  476,  477,  480 

sinking  funds,  treatment  of,  301, 
302 

trading  corporation,  368,  369 
Baldwin  Locomotive  Works, 

sinking  fund  provisions,  281 
Bankruptcy, 

dissolution  of  corporation,  517, 
518 

receiver  in,  485 
Banks, 

capital  stock  issued  at  premium, 
116 

capital  stock  subject  to  special 
liabilities,  20 

dividends  paid  by,  153 

federal  land,  federal  tax  exempt, 
388 

joint-stock  land,  federal  tax  ex- 
empt, 388 

mutual  savings,  federal  tax  ex- 
empt, 387 

national,     surplus     contributed, 
336 

surplus  distinguished  from  un- 
divided profits,  335 
Benefit  reserves,  333,  334 
Benevolent    organizations       (See 
"Charitable    corporations") 
Boards  of  trade, 

non-stock  corporations  (N.  Y.), 

3 
tax   (federal)  exempt,  387 
Bond, 
capital   stock  certificate  reissue 

may  require,  11 
Bond  discount  account,  96 
Bond  dividends     (See  "Dividends, 

bond") 
Bondholders'  index,  231,  235 
Bond  premium  account,  95,  96 
Bond  register,  231,  232,  233 


INDEX 


545 


Bonds,     (See  also  "Coupons") 
account,  95 
adjustment,  218 
bonded  indebtedness,  203 
cancelled,  203 
cancelled  through  sinking  fund, 

297,  298 
capital  stock  preferred  compared 

with,  24 
car  trust,  219 
classification  of,  208 
collateral   trust,   209,   217,   245- 
248 
notes,  short  term,  246 
Public     Service     Commission 
(N.  Y.)   requirements,  246, 
247 
consolidated,  218 
construction,  219 
convertible,  213  ,214 
coupon,  210,  221-223,  224,  225 
collection  on,  252,  253,  254 
form  of  coupon,  225,  226 
payment  of,  236 
debenture,  208,  209,  217 

dividends   paid  with,   152 
default  on,  317,  318 
defined,  197 
denomination  of,  198 
discount  and  premium  on,  266- 
278 
accounting  entries,  268 
effective  rate  method,  270-272 
nature  of,  269 
treatment  of,  269 
dividends  on.  216.  217 
entries,  239-278,     (See  also  "re- 
demption" below) 
sinking  fund,  279-304 
equipment,  219 
equipment  trust.  219 
redemption  of,  316 
equipment  trust  serial,  248-250 
accounting  entries,  250 


escrow,  202 

expenses     covering    issue,     ac- 
counting entries,  267 
extension,  219 
first  mortgage,  212 
form  of,  221-230 
funded  debt,  203 
gold,  213 

guaranteed,  217,  218,  245 
liability  of  guarantor  contin- 
gent, 317 
redemption  of,  317 
income,  217 

interest  on,  261,  262 
interest  on,  210,  218,  235,  252- 
265 
accruals  monthly,  255 
effective  interest  method,  274- 

278 
equal  instalment  method,  275- 

278 
issues,  two  or  more,  257,  258 
legal    proceedings    to    collect, 

24 
outstanding  method,  275-278 
payment  of,  252-255 
unpaid,    may    mature    bonds 
prematurely,  24 
issuance  of,  199-201 

procedure,  200 
issued   and   outstanding.   Inter- 
state    Commerce     Commis- 
sion designation  of,  203^  204 
issues, 
authorization,  198,  199 
"authorized,"  202 
Constitutional    provisions    af- 
fecting, 199 
deed  of  trust.  226-230 
defined.  198 
expenses  covering.  268 
"nominally   outstanding,"   202 
"outstanding,"  202 


546 


INDEX 


Bonds — continued 
issues — continued 
Public    Utility    Commissions' 
authorization,  198,  199,  200 
regulations  covering,  240 
sinking  funds  for  redemption 

of,  279-304 
statutes  affecting,  199 
stockholders'  assent  required, 
199 
kind  of,  212 

mortgage,  206,  209,  212,  246 
class  of,  209 
first,  sale  at  par,  241 
junior  lien,  209,  212,  213 
negotiable  instruments, 

holders'  rights,  206 
negotiable   instruments    if   pay- 
able "to  order,"  etc.,  197 
nominal  issued,  pledged  as  se- 
curity for  bank  loans,  316 
participating,  198,  216,  217 
premium  on     (See  "Bonds,  dis- 
count   and    premium    on") 
preparation  of,  201 
prices  of,  213,  214 
profit-sharing,  216,  217 
purchase  money,  220 
realty  covered  by  deed  of  trust, 

200 
redeemable,  215,  216 
redeemed,  cremation  of,  318,  319 
redemption  of,  206,  215,  216,  305- 

319 
accounting    entries,   295,   296, 

310,  312-317 
collateral  trust  bonds,  314,  315 
convertible  bonds,  314 
drawn  by  lot,  308,  309 
methods  of,  305 
notes,  short  term,  316 
notice,  310 

refunding  bonds,  310-312 
serial  bonds,  313,  314 


sinking  fund,  306-308 
refunding,  218,  310-312 

accounting  entries,  312 
registered,  207,  210,  211 
assignment  of,  211 
exchange    for    coupon   bond, 

211 
interest  on,  255 
pledges  of,  207 
transfer  of,  234 
reorganization,  218 
sale  of,  205,  239-251 
accounting    entries    covering, 

242 
between  interest  dates,  267 
interest   accrued   on   sales   at 

par,  243 
usury,  205 
seal  required  in  execution  of,  197 
serial,  214,  215 
accountin ;     entries     for     re- 
demption, 313 
special  issues,  interest  on,  262 
"subscribed,"  202 
subscriptions,     instalment    pay- 
ments, 244 
suit  for  non-payment  at  matu- 
rity, 207 
terminal,  219 

terminology  covering,  202,  203 
treasury,  202 

interest  on,  259-261 
trustee  for,  200 
trustee's  certificate,  200 
underlying,  213 
underwriting,  239 
unsubscribed,  202 
Bonus  account,  125 
Bonus  capital  stock,  21 
Books,  corporate,  44-79,  139,  140, 
231-238      (See   also   "Bond 
register,"      "Stock     book," 
etc.) 
Pennsylvania  statutes,  167 


INDEX 


547 


Brokers,  stock  book  or  ledger  re- 
quired in  N.  Y.,  75,  76 
Building    and    loan    associations, 
tax  (federal)  exempt,  387 
Business    leagues,    tax    (federal) 

exempt,  387 
Business  organization, 
corporation,  i,  13,  14 
partnership,  i,  12,  13 
proprietorship,  i 
By-laws, 
charter  prevails  over,  6 
directors     make,     authorization 

required,  6 
dividends  affected  by,  133,  134 
meetings, 
annual,  31 
notice  of,  33 
proxies,  32 
New  York  form  of,  531-534 
quorum  specified  in,  33,  39 
stockholders  make,  6 
subordinate  to  state  laws,  6 
transfer  book  closing  and  open- 
ing, 32 


Calendar,  corporate,  30,  40,  41,  42 

essentials  to  be  recorded,  41 

New   York  corporation,  41,  42, 
43 
Call  and  waiver  of  notice, 

directors'  meeting,  540,  541 

stockholders'  meeting,  537 
Capital, 

actual,  16 

impairment  of,  91,  93,  154,  155 

nominal,  16 

property,  16 

share,   16 

working,  defined,  17 


Capitalization,      (See  also  "Capi- 
tal stock") 
defined,  16 
o  ve  rcapital  ization, 
good-will   account  to  record, 
179 
Capital   stock,      (See  also  "Divi 
dends,"  "Investments,"  and 
"Subscriptions") 
accounting  entries,  loi 
allotment  of,   183 
amount  regulated  by  statute,  8 
assets   from  sale  of,  19 
assignment  of  certificate,  64 
authorized,  account,  82 
basis  of  determining  amount,  8 
bonus,  common  stock,  21 
bonus  paid  in,  125 
cancelled    for    non-payment    of 

instalments.   127 
certificate  book,  60,  61,  62 
certificates,  61 
fee  for  issuance,  11 
instalment  payments,  53,  54,  56 
issuance  of,  11,  85 
loss  of,  II,  71 
reissue  of  lost,  11 
signature.  New  Jersey  statute, 

7 
"split,"  65 
transfer,  65 
commissions  paid  in,  117 
"common,"  22,  80,  81 
certificates,  61,  62 
dividends    postponed    to   pre- 
ferred stock,  25 
defined,  8,  16 
donated,  21 

accounting    entries,    119,    120, 

121,  122,  173 
mining  corporation,  174 
proceeds  not  applicable  to  div- 
idends, 120 
trustee  for,  174 


548 


INDEX 


Capital  stock — continued 
entries,     (See  "Accounting") 
exchange  of,  130,  131,  132 
"ex-dividend,"  135 
forfeited,   172,   175 
full-paid,  19,  20,  21 

accounting   entries,    103,    104, 
IDS,  106 
"full-paid   and   non-assessable," 

22 
functions  of,  18 
instalment,    accounting    entries, 

106,  107,  108 
interest  not  paid  on,  18 
issued  and  unissued  stock,  19 
issued  at  par  for  value,  17 
issued  for  property  or  services, 

20 
issue  limited  by  charter,  16 
kinds  of,  16 

liability  of  holder  of  instalment 
stock,  20 . 

partly  paid  stock,  20,  21 
liability  represented  by,  81 
nature  of,  18 
non-assessable,  22 
"original  issue,"  19,  101-118 

liability  attached  if  issued  as 
bonus,  125 

liability  of  purchaser  if  sold 
below  par,  112 
outstanding,  19 
owner  of. record,  10 
ownership,  legal  evidence  of,  71 
partly  paid,  19,  20 
par  value  unspecified,  17 
preferred,  22,  23,  24 

account,  81 

certificates,  61,  63 

convertible,  26,  27 

dividends,  cumulative,  24,  26 

guaranteed,  27 

non-participating,  26 

not  a  debt,  24 


sinking   fund   for  retirement, 

287,  288 
voting  right  conditional,  24 
voting  right  denied,  24 
purchase   of   corporation's   own 

stock,  126,  127,  128 
purchase  of  stock  of  other  cor- 
porations, 129,  130 
reduction  in  reorganization,  474 
reduction  regulated  by  statute, 

126 
register  of  transfers,  67,  68,  69, 

70 
resale  of,  126,  127 
salaries  paid  in,  117 
sale  of  corporation's  own  stock, 

127 
sale  of  stock  of  other  corpora- 
tions, 128,  129 
shares,  par  value  of,  9 
sold  after  organization,  entries, 

III 
stock  book  or  ledger,  71,  72,  73, 

74,  75,  162 
subscribed,  account,  85 
subscription  list,  forms,  52,  53 
subscriptions,  49,  157 
forfeited,    172,    175 
instalment  payments,  51 
irrevocable  if  by  charter  ap- 
plication, 51 
list  of,  50 

notes  given  in  payment,  49 
paid   by   crediting    dividends, 

147,  148,  149 
prorating  of,  53 
rejection  of,  53 
surplus  created  by  issuance  at 

premium,  116 
transfer  book,  66 
transfer  of,  10 
transfer  tax,  14 
treasury  stock,   19,  21,  22,  II9- 
128 


i 


INDEX 


549 


Capital  stock — continued 
treasury  stock — continued 
salable  below  par,  21 
underwriting  bonus,  184 
voting  rights,  none,  126 
trust  fund,  payment  of  debts,  19 
underwriting  expenses,  183,  184 
unissued  does  not  receive  divi- 
dends,  19 
unissued  has  no  vote,  19 
unissued  is  valueless,  19 
voting,  12,  19,  22,  24,  33.  36,  37, 
39.   126 
CO rpo,Tati on-owned    shares 

have  no  note,  126 
cumulative,   12,  36,  37 
"watered,"  27,  28,  29 
without  par  value,  89-91 
Capital  surplus,  88 
Car  trust  bond,  219 
Cash  book, 

entries,  165,  170 
Cash  receipts  and  disbursements, 

349-351 
Cemeteries, 

non-stock  corporations,  3 
tax  (federal)  exempt,  387 
Certificate  of  incorporation     (See 

"Charter") 
Certificates,    capital    stock      (See 

"Capital  Stock") 
Chambers  of  commerce, 

tax  (federal)  exempt,  387 
Charitable  corporations, 
Pennsylvania  classification,  2 
tax  (federal)  exempt,  387 
CHiarter,  5,  6,  48,  156,  159.  529 
capital  stock  issued  limited  by, 

16 
filing  of,  159 
issuance  omitted,  5 
merger    requires    surrender    of 
old,  410 


New  York  form  of,  529,  530 
subordinate  to  state  laws,  6 
Checks,  dividend.  78,  138 
Chesapeake  &  Ohio  Ry.  Co., 

bonds  sold  at  discount,  266,  267 
Churches, 
non-stock  corporations  (N.  Y.), 

3 
Pennsylvania  classification,  2 
Cities     (See  "Municipal  corpora- 
tions") 
Civic  leagues, 

tax  (federal)  exempt,  387 
"Close  corporation,"  defined,  10 
Closing  the  books,  320-337     (See 

also   "Accounting") 
Qubs, 

capital  stock  without  par  value, 

91 
tax  (federal)  exempt,  387,  388 
Collateral    trust    bond,    209,    217, 

245-248 
"Combination  record,"  47 
Combinations      ( See    "Consolida- 
tions, corporate") 
Commissions,  capital  stock  in  pay- 
ment of,  117 
Committees,  report  of,  375,  376 
Common    stock       (See    "Capital 

stock") 
Consolidated  bond,  218 
Consolidations,  corporate,  390-468 
holding  companies,  392,  441-453 
accounting  procedure,  443-453 
controlling  corporation,  441 
subsidiary  corporation,  442 
interlocking  directorates,  393 
investigation,    preliminary,    393- 
400 
assets,  394-397 
liabilities,  397,  398 
reports   and   certificates,   400- 

402 
revenue  and  expenses,  398-399 


550 


INDEX 


Consolidations — continued 
lease,  392,  429-440 
accounting  procedure,  433-440 
guarantee  records,  431 
property  records,  430,  431 
merger,  391,  403-428 
accounting     entries,     411 -419, 

421-427 
balance  sheet,  426,  427 
balance  sheets  of  companies, 

404,  405 
charters   of   merging   compa- 
nies, 410 
good-will  apportioned,  407 
procedure  and  conditions,  403, 
404,  409,  410 
methods  of,  391-393 
parent  companies,  392,  454,  455 
purchase,  391,  392,  428 
purposes  of,  390 
Constitutional  provisions  affecting 

bond  issues,  199 
Construction  bond,  219 
Contracts,  receiver  has  option  of 

cancelling,  484 
Convertible  bond,  26,  27,  213,  214 
Convertible  stock,  26,  27 
Co-operative  organizations, 
New   York  State,  3 
non-stock  corporations,  (N.  Y.) 
3 
Corporation, 
accounts     (See  "Accounts"  and 

"Accounting") 
advantages  of,  12,  13 
books  and   records,  44-79,   139, 
140,     231-238       (See     also 
"Bond      register,"      "Stock 
book,"  etc.) 
by-laws  (N.  Y.),  531-534 
calendar    (See  "Calendar") 
capitalization  defined  by  charter, 
6 


charter,  form  of   (N.  Y.),  529, 

530 
"close,"  10 

consolidation     (See  "Consolida- 
tion") 
created  by  legislative  act,  3 
created  by  state  laws,  3 
defined,  i,  10 
disadvantages,  13,  14 
dissolution         (See      "Dissolu- 
tions") 
"domestic,"  4 

duration  defined  by  charter,  6 
existence  not  affected  by  death 

or  withdrawal,  6 
financial,     double     liability     on 

capital  stock,  116 
foreign,  4 
denial  of  state  privileges,  4 
exclusion  by  state,  when  con- 
stitutional, 4 
license  fees  required,  4 
formation       (See     "Incorpora- 
tion") 
form  of, 
business,  2 
financial,  2 

non-stock  (New  York),  2,  3 
stock  (New  York),  2,  3 
holding     companies,     129,     392, 

441-453 
incorporation    (See  "Incorpora- 
tion") 
indebtedness  limited  by  statute, 

199 
investigations      preliminary     to 

consolidation,  390-402 
kind  of, 

non-profit  making,  2,  3 
Pennsylvania  classification,  2 
profit-making,  2,  3 
legislation  controlling, 
Clayton  law,  443 
Sherman  Anti-Trust  Act,  443 


INDEX 


551 


Corporation — continued 
liquidation  'of, 
assets,  distribution  of,  154 
property     dividend     declared, 
153,  154 
location  defined  by  charter,  6 
management,  7,  13 
manufacturing,   166-171 

entries,  opening,  167,  168 
mining  (Michigan),  ly  1-176 
entries,  opening,  172,  173 
non-stock,  capital  stock  without 

par  value,  91 
one-man  company,  10 
"operating  companies,"  129 
organization  procedure,   156-165 
purposes  defined  by  charter,  6 
receivership       (See    "Receiver- 
ship") 
receivership  and  reorganization 
(See  "Receivership  and  re- 
organization") 
reorganization    (See  "Reorgani- 
zation") 
reports    and    statements      (See 
"Reports"       and       "State- 
ments") 
reports  required  from,  15 
seal,  7 
social,  2,  91 
speculative, 
capital  stock,  full-paid,  21 
donated  stock.  119 
stock  of     (See  "Capital  stock") 
subject  to  state  law,  3 
taxable,  386,  387 
taxes  levied  upon,  14 
tax-exempt,  387,  388 
termination  of,  10 
Countersignature,     capital     stock 

transfers,  69 
Counties  incorporated  (N.  Y.),  3 
County  clerk  (N.  Y.),  157 
Coupon  bond,  210 


Coupons, 
form  and  nature  of,  225,  226 
negotiable    bonds,     method    of 

handling,  207 
payment  of,  236 
receipt  for,  237 
report  covering,  236 
register,  237,  238 
suit    for    non-payment    at    ma- 
turity, 207 
Court  decisions, 
Rubber    Co.    v.    Goodyear    (N. 
Y.),  134 
Cumulative  dividends,  24,  25 
Cumulative  voting,  12,  36,  37 
"Cutting  a  melon,"  145 


Death  of  individual,  does  not  af- 
fect corporation's  existence, 
6 
Debenture  bonds,  208,  209 

serial,  215 
Debts,  corporate, 
capital  stock  issued  in  liquida- 
tion, 117,  118 
Deed  of  trust, 
bond  issue  covered  by,  226,  227 
contents  essential,  228,  229 
execution  of,  230 
failure  makes  bond  issue  unse- 
cured obligation,  228 
filing  of,  230 
Deficiency  account,  335 

bankruptcy,     dissolution 
through,  5 19,  524 
Deficit, 

balance  sheet,  consolidated,  462 
Depreciation, 
calculation  of, 

diminishing  value  method,  329 
proportionate  instalments,  328 
closing  of  books,  321 


552 


INDEX 


Depreciation — continued 
defined,  327 

machinery,  rate  on,  328 
methods  of  handling,  327,  328 
offset  by  improvement  and  main- 
tenance charges,  328 
Dickinson,  A.  Lowes, 
quoted   on  bond   premium   and 
discount,  269,  272-274 
Directorates,  interlocking, 

consolidations,  corporate,  393 
Directors, 
dividend  declaration,  133 
elect  officers,  7 
election  of,  35 
liability  of, 
dividends   unearned  declared, 

154,  155 
illegal  dividends,  155 
meetings,   i6i,  162 
minutes  covering,  537-540 
notices  of,  39 
proxy  not  allowed,  39 
quorum,  39 
record  of,  15 
number  defined  by  charter,  6 
number  prescribed,  7 
power  to  act,  7 

report  to  stockholders,  383,  384 
rights  to  examine  books,  45 
stockholders  elect,  7 
Discount,     bond       (See    "Bonds, 

discount   and   premium") 
Dissolutions,  corporate,  517-527 
bankruptcy,  517,  518 

deficiency  account,  519,  524 
realization  and  liquidation  ac- 
count, 519,  520 
trustee's  cash  account,  525-527 
informal,   517 
voluntary,  517 
Dividend, 

book,  76,  77,  138,  140,  141 


Dividends,  133-146 
account,  94,  95 
accounting  entries,  101,  137 
bank,  153 
bond,  2i6,  217 
bonds  issued  in  payment  of,  152 

objections   to,    152 
"bonus,"  145 
by-laws  covering  declaration  of, 

133,  134 
capital  stock,  preferred, 
cumulative,  25 

cumulative  if  not  specified,  26 
non-cumulative,  25 
not  a  debt  of  corporation,  24 
capital  stock  subscriptions  paid 

by,  147,  148,  149 
capital  stock  unissued  does  not 

participate,  19 
cash,  entries  covering,  141,  142 
check,  form  of,  78 
cumulative,  24 

entries  covering,  149,  150 
method   of    handling    unpaid, 
24 
declaration  of,  133,  135,  136 
transfer  books  closed,  135 
declaration  omitted,  134 
■  defined,  133 
directors'  power  to  declare,  133 
endangering   solvency   of   com- 
pany not  permitted,  19 
illegal,  136 

impairing  capital  stock  not  per- 
mitted,  19 
"interim,"  145,  146 
non-cumulative,   expired   if  not 

paid,  24 
notes    issued    for    payment   of, 

152 
notice  of,  78,  136 
publication,  136 
order,  79 
ownership  of,  136,  137 


INDEX 


553 


Dividends — continued 
"passed,"   134,   149,   150 

contingent  liability,  150 

entries  covering,   150 
payment  of,   137,   138 

borrowed  money  for,   143 
premium  on  capital  stock  not  di- 
rectly applicable  for,  88 
profits  payable  as,  8 
property,   153 
receipt  for,  141 
resolution  declaring,  135 
scrip,   144,   145 

definition,  144 

entries  covering,  144,  145 
sheet  or  list,  138,  139,  141 
special,  145 

entries  covering,   146 
stockholders'  liability  when  divi- 
dends are  credited,  147 
stock  issued  in  payment  of,  151 
surplus  as  means  of  equalizing, 

134 
unearned,  154,  155 
Donated     stock       (See     "Capital 

stock,    donated") 
Donation  account,  87 


Educational  organizations, 

tax   (federal)   exempt,  2^7 
Election, 

directors',  35 

inspectors  of,  35 

officers',   40 
Electric    light    and   power      (See 

"Public  utilities") 
Employees,  profit-sharing,  145 
Entity,  corporate, 

foreclosure  proceedings,  470 
Entries     (See  "Accounting") 
Equipment  trust  bond,  219 
Erie  Railroad  Company, 

sinking  fund  provisions,  281 


Escrow  bonds,  202 
Expenses  of  bond  issue,  268 
Extension  bond,  219 
Extinguishment  fund     (See  "Sink- 
ing funds") 


Farmers', 
mutual  insurance, 
tax  (federal)   exempt,  388 
Farm-loan  associations,  national, 

tax  (federal)  exempt,  388 
Federal  Income  Tax,  14 
assessment  date,  43 
report  for,  42 
Fees, 
filing  certificate  of  incorporation, 

157 
payment  of  state,  159 
recording    certificate    of    incor- 
poration, 157 
Fiscal  period, 

closing  of  books.  320,  321 
Foreclosure  proceedings, 
entity   of  corporation   does  not 
pass,  470 
Franchise     tax       (See     "Taxes, 

corporation") 
Fraternal  beneficiary  societies, 

tax  (federal)  exempt,  387 
Fruit-growers,     mutual     associa- 
tions, 
tax   (federal)   exempt,  388 
Funded  debt    (See  bonds,  203) 
Funds,  reserve    (See  "Reserves") 


Gas     (See  "Public  utilities") 
General  Electric  Co., 

good-will,  treatment  of,  180 
Gold  bond,  213 
Goodrich,  B.  F.  Co., 

good-will,  178 


554 


INDEX 


Good-Will, 

account,  99,  lOO 

accounting  treatment  of,  179 

apportionment  in  merging  com- 
panies, 407 

book  value  unchangeable,  180 

defined,  177,  178 

fictitious,  475 

General  Electric  Co.,  treatment 
of,  180 

Goodrich,  B.  F.  Co.,  valuation, 
178 

Royal  Baking  Powder  Co.,  valu- 
ation, 178 

valuation,  formula  for,  178,  179 

Victor    Talking    Machine    Co., 
treatment  of,  180 
Guaranteed  bond,  217,  218 
Guaranteed  stock,  27 

H 

Holding  companies,  129,  392,  441- 

453 
Horticultural  corporations, 

tax   (federal)   exempt,  387 
Hospitals,  Penn.  classification,  2 


Illegal  corporate  action, 

convertible     stock     and     bond 
question,  26 
Illinois, 

incorporation  of  partnership  in, 

177 
statutes, 

account,  books  of,  186 

capital  stock  must  be  entirely 
subscribed,  180 

capital  stock,  one-half  must  be 
paid,  180 

capital    stock,    purchase    and 
sale,   128 

incorporation    dissolves    part- 
nership, 180 


Impairment  of  capital,  91,  93,  154, 

155 
Income, 
account,  consolidated,  468 
bonds     (See  "Bonds,  income") 
interest  charge,  274 
interest  on  investments,  264,  265 
statements,  343-349 
tax       (See     "Federal     Income 
Tax") 
Incorporation,      (See   also    "Cor- 
poration") 
agreement  for,  181,  182 
charter,  5 

form  of  (N.  Y.),  S29,  530 
partnership,    24,     156-165,     177- 

194 
procedure  of,  4,  5 
pro  forma  statement,  103 
proprietorship      (New     York), 

156-165 
State    requirements    and    privi- 
leges vary,  4 
Incorporators, 
eligibility  of,  5 
number  of  (New  York),  156 
qualifications  required  of,  156 
Indebtedness, 
bonded,  203 
Inheritance  tax,   14 
Insolvency, 
dissolution  of  corporation,  517, 

518 
liability  of  purchasers  of  partly 
paid  stock,  20 
Instalment, 
account,  86 
book,  57,  58,  59,  107 
receipts,  54 
scrip,  54,  55 

stock,  liability  of  holder,  20 
Insurance  companies, 
capital  stock  issued  at  premiuna, 
116 


INDEX 


555 


Insurance  reserves,  333,  334 
Interest, 
bond,     210,     218       (See     also 
"Bonds") 
account,  97 
bonds,  not  coupon,  235 
bonds     sold     between     interest 

dates,  267 
capital  stock  does  not  draw,  18 
construction  charged  with,  263, 

264 
income   from   investments,   264, 

265 
on  mortgages,  account,  97 
sinking  funds,  292 
International   Harvester   Co., 
reserves   for   insurance,   benefit 
and  accident  funds,  333,  334 
Interstate  commerce, 
foreign  corporation  entitled   to 
privileges  granted  domestic 
corporation,  4 
Interstate  Commerce  Commission, 
bonds    issued   and    outstanding, 

203,  204 
interest  charged  to  construction, 

263,  264 
sinking     fund     regulations     for 
railroads,  289,  290 
Inventories, 

closing  of  books,  321 
Investment,      (See  also   "Sinking 
funds") 
account,  100 

purchase  and  sale  of  stock  of 
other  corporations,  128 

J 

Journal      (See    "Accounting    en- 
tries") 
Junior  lien  bond,  209 

L 

Labor  organizations, 
tax  (federal)  exempt,  387 


Lease,  consolidation  by,  392,  429- 
440     (See  also  "Consolida- 
tion") 
Leases,  receiver's  option  of  can- 
celling, 484 
Ledger, 
accounts     (See  "Accounts") 
closing  of,  322,  323 
stock,   169 
subscription,  84 
Liabilities, 

contingent,  closing  of  books,  322 
Liability, 
bond  vendor's,  205 
capital  stock  partly  paid,  20,  21, 

147 
corporate    capital    stock   is    not 

legally,  18 
directors',  154,  155 
purchaser's,  capital  stock  origi- 
nal issue  below  par,  112 
License  fees,  state  taxes,  14 
Lumber  corporation, 
balance  sheet  consolidated,  463, 
466,  467 

M 

Machinery,  depreciation  on,  328 
Macpherson,  F.  H.,  F.C.A.,  CP.A., 
quoted     on     Corporation     Ac- 
counting and  Investigations, 
39>402 
Manager, 
duties  of,  8 

responsible  to  directors,  8 
Manufacturing, 
account,  355 
corporation, 

Pennsylvania,  166-171 
statements,  352-364 
Meetings, 
annual,  30 
by-laws  govern  time  of,  31 
directors,  election  of,  35 


556 


INDEX 


Meetings — con  tinued 
annual — continued 

formalities,  opening,  34 

minutes  of,  38 

notice,  method  of  giving,  33 

notice  to  stockholders,  31 

officers'  reports,  37 

preliminary  arrangements,  31 

procedure  at,  34 

quorum,  33 

time  of,  31 

transfer  books,  closing,  32 

voting  rights,  32 
directors', 

election  of  officers,  40 

minutes  of,  537-540 

notices  of,  39 
legal  requirements  as  to,  30-33 
minutes      (See  "Minutes") 
notice  of,  31,  32,  33,  40 
proxy     (See  "Proxy") 
special,  30,  40 

authority  for  call  of,  40 

bond  issue  requires,  200 

legality  of  notice  a  factor,  40 

notice  must  state  business,  30, 
40 
stockholders',  30,  31,  32,  33,  160, 
161,  534-537 

laxity   in    small    corporations, 

30,  31 
quorum   specified   in  by-laws, 

33 
quorum   specified   in  statutes, 

34 
voting     (See  "Voting") 
waiver   of   notice,  42,    161,   540, 

541 
Merger       (See     "Consolidations, 

corporate") 
Michigan, 

corporation,  mining,   171-176 
Mines,  exhaustion  of, 
sinking  fund  covering,  331-333 


Minutes, 
annual  meetings,  38 
arrangement  of,  39,  48 
book  of,  IS,  47,  48 
corrections,  method  of  making, 

35 
directors',  form  of,  S37-540 
essentials  to  be  included,  38,  40 
quorum     or     number     present 

should  be  recorded,  34 
safeguarding  of,  47 
stockholders'  form  of   (N.  Y.), 
534-536 
Missouri  Pacific  Co., 

notes,  extension  of,  318 
Missouri  statutes, 
holding    companies    prohibited, 
442 
Motions,' verbatim  record  on  min- 
utes, when  needed,  38 
Municipal  corporations. 
New  York  state,  2,  3 
Pennsylvania  classification,  2 
Mutual  companies, 
tax  (federal)  exempt,  388 

N 

New  Jersey, 
merger  of  corporations,  403-428 
statutes, 

capital  stock  certificates,  7 
capital    stock    purchase    and 

sale,  128 
convertible  stocks  and  bonds, 

U.  S.  Steel,  26 
holding  companies  permitted, 

442 
suit  prior  to  foreclosure  for- 
bidden, 207 
New  York  State, 
comptroller,  report  to,  43 
corporate  calendar,  41,  42,  43 


INDEX 


557 


New  York  State — continued 
corporate     organization     proce- 
dure,  156 
kind  of  corporations,  2,  3 
proprietorship  incorporated,  156- 

165 
Public  Service  Commission,  246, 

247 
statutes, 
accounting  records,  examina- 
tion of,  45 
capital    stock    purchase    and 

sale,  128 
capital  stock  without  par,  119 
charter,  529,  530 
corporation     shares     without 

par  value,  17 
director's    right    to    examine 

books,  45 
quorum  stockholders  required, 

34 
receivership,  482 
stock  book,  45,  162 
stock    book    or    ledger    pre- 
scribed, 72,  75,  162 
subscriptions   not  payable   by 
note,  49 
New  York  Stock  Exchange, 

register  required  by,  6g 
Nominal  issued  bonds,  pledged  as 
security  for  bank  loans,  316 
Non-assessable  capital  stock,  22 
Non-cumulative  dividends,  25 
Non-participating  preferred  stock, 

26 
North  Carolina,  statutes,  bond  is- 
sues affected  by,  199 
Notes, 
collateral  lien,  220 
dividends  paid  with,  152 
short  term,  220,  246 

redemption  of,  316 
subscriptions  paid  by,  49 


Notices, 
dividend,  136 
meetings,  31,  32,  33 
special    meetings,    legality    de- 
pends upon  notices,  40 

o 

Officers, 

duties  defined  by  statute  in  New 
Jersey,  7 

duties  defined  in  by-laws,  7 

election  of,  7,  40 

reports  of,  375-383 
"One-man  company,"  10 
Opening     entries        (See     "Ac- 
counting") 
Operating  companies,  129 
Organization, 

expenses,  account,  92 

expenses,  entries  covering,  163 

procedure,  156 

tax  (N.  Y.),  157 
Overcapitalization       ( See     "Capi- 
talization") 


Parent  companies, 

consolidations,     corporate,    392, 
454,  455 
Partnership, 

books,  closing  of,  191-195 

defined,  i 

incorporation    of,    24,    156-165, 
177-194 

liability  of  individual,  12 
Patent  rights, 

capital  stock  in  payment  for,  123 
Penalty, 

annual  report  to  state  (N.  Y.) 
not  filed,  42 

comptroller   (N.  Y.)   report  to, 

43 
stock  book  not  open  for  inspec- 
tion (.N.  Y.),  45 


558 


INDEX 


Pennsylvania, 
books  required  by  statute,  l66, 

167 
charter  limits  to  one  object,  156 
corporate  reports  required,  386 
corporation,  manufacturing,  166- 

171 
kinds  of  corporations,  2 
payments    required    by    statute, 

166 
receiver's  liability,  484,  485 
statutes, 
capital     stock    purchase    and 

sale,  128 
receivership    forms   and   pro- 
cedure, 490-501 
Pennsylvania  Railroad  Co., 
bonds,  guaranteed,  317 
bonds  sold  at  premium,  266,  267 
capitalization,  10 
leased  property,  guarantees  not 

recorded  on  ledger,  431 
reserves    for   insurance,    benefit 
and  accident  funds,  333 
Preferred  dividends,  23 
"Preferred"  stock     (See  "Capital 

stock,  preferred") 
Premium, 
bond     (See  "Bond  discount  and 

premium") 
on    capital    stock,    account,    88, 
114,  115,  116 
President, 

duties  of,  7 
Profit  and  loss  account, 
manufacturing  corporation,  358, 

359 
trading  corporation,  367,  368 
Profit-sharing,  145 

bond,  216,  217 
Profits, 
accounting  entries,   loi 
divided  without  dividend  being 
declared,  134 


dividends  payable  from,  8 
errors  calculating,  154 
salaries  as  medium  of  conceal- 
ing, 134 
undivided     (See  surplus,  93) 
Pro  forma  statement,  103 
Property  dividends      (See   "Divi- 
dends, property") 
Proprietorship, 
defined,  i 

incorporation  of   (N.  Y.),  156- 
165 
Proxy, 
directorate  affected  by,  35 
director's,   not   allowed,  39 
notice  of  meeting  usually  con- 
tains, 33 
stockholders'  meeting,  536 
voting  rights,  31 
Public  Service  Commission, 
New  York, 
bond  issue  expenses,  268 
bonds,    collateral    trust,    246, 
247 
"Surplus    and    Deficiency"    ac- 
account,  335 
Public  utilities, 
bond  issue,  regulations  covering, 

198,  199,  200,  240 
form  of  corporation,  2,  3 
Interstate    Commerce    Commis- 
sion, report  to,  386 
Purchase  money  bond,  220 


Quarries,  exhaustion  of, 

sinking  fund  covering,  332 
Quasi-public    corporations       (See 

"Public  utilities") 
Quorum, 
by-laws  specify,  33 
Canada,  two  minimum  at  meet- 
ting,  34 


INDEX 


559 


Quorum — continued 

directors'  meetings,  by-laws 
regulate,  39 

England,  two  minimum  at  meet- 
ing, 34 

New  York,  representation  re- 
quired by  statute,  34 

statutes  regulate  in  some  states, 
34 


Railroads,       (See     also     "Public 
utilities") 
sinking   funds.   Interstate  Com- 
merce   Commission    regula- 
tions, 289,  290 
Realty,  bond  issue  involving,  230 
Receipt,  treasurer's, 
capital  stock  payments,  60 
instalment  payments,  55 
Receiver, 
accounts  of,  485,  486 
appointment,  481,  482 
authority  of,  481 
contracts,  cancellation  of,  484 
leases,  cancellation  of,  484 
bankruptcy  cases,  485 
certificates  of  indebtedness,  484 
compensation  of,  485 
definition,  481 
liability  of,  484,  485 
limitations  placed  upon,  483 
powers  of,  482,  483 
receivership  and  reorganization, 
487-507 
Receivership,   481-486     (See  also 
"Receivership  and  reorgan- 
ization") 
Receivership    and    reorganization, 
487-507 
accounting    procedure     for    re- 
ceiver, 493,  494,  495 
Pennsylvania  requirements,  490- 
501 


preliminary  arrangements,  487 
reorganization, 
adjustment  of  accounts,  503- 

505,  506,  507 
agreement,  488,  489 
committee,  488 
notice  to  bondholders,  488 
Receivership  and  sale,  508-516 
accounting  procedure,  509-516 
property  transfers,   county   rec- 
ords must  cover,  515 
Record,  "combination,"  47 
Records,  44-79,   139,   140,  231-238 
(See  also  "Bond  register," 
"Stock  book,"  etc.) 
Redeemable  bonds,  215,  216 
Redemption    of   bonds,    206,    215, 
216,     305-319       (See     also 
"Bonds") 
Refunding   bonds     (See   "Bonds, 

refunding") 
Register, 
bond,  231,  232,  233 
stock,  69,  70 
transfer,  67,  68 
Registered  bond,  207,  210,  211 
Registrar,  65 
New  York  Stock  Exchange  re- 
quirements, 69 
Religious  organizations, 

tax   (federal)  exempt,  387 
Reorganization,      (See   also   "Re- 
ceivership  and    reorganiza- 
tion") 
agreement  method,  469-480 
balance  sheets, 
prior  to  adjustment,  476,  477 
subsequent  to  adjustment,  480 
bonds,   218 

capital  stock  reduction,  470,  471 
accounting  requirements,  473, 

474,  478,  479 
statutory  requirements,  473 
conditions  of,  475 


56o 


INDEX 


Reports,  374-389 
annual,  to  state  (N.  Y.),  42 
auditor's,    37s,    376,    377,    378, 

379 
committees',  375,  376 
corporation  to  government,  15 
directors',  383,  384 
manager's,  375,  379,  380 
officers',  375,  380-383 
president's,  375,  381-383 
statutory,  384 
federal,  386 

fiscal  or  calendar  year,  389 
state,  385 
tax,  federal,  15 
tax,  local,  15 
tax,  state,  15 
treasurer's,  375,  380,  381 
"Reserve  Fund," 
English  and  Canadian  term  for 
surplus,  334 
Reserves,       (See    also     "Sinking 
funds") 
bad  debts,  324 
closing  of  books,  321,  323-327 
depreciation,  330,  331 
funds  for,  3(23-325 
secret  or  hidden,  325-327 
created  by  acts  or  omissions, 
326 
Resignation,   individual, 
no   effect   on   corporation's   ex- 
istence, 6 
Resolution, 

dividend,  135 
Royal  Baking  Powder  Co., 

good- will,  178 
Rubber  Co.  v.  Goodyear  (N.  Y.), 
dividends  reduced  by  salary  in- 
creases, 134 


Salaries, 
capital  stock  in  payment  of,  117 


Sale, 
property     transferred     by     re- 
ceiver, county  records  must 
cover,  515 
Scientific  organizations, 

tax  (federal)  exempt,  387 
Scrip   dividend     (See  "Dividend, 

scrip") 
Seal,  corporate,  7 
Secretary,  duties  of,  7 
Secretary  of  State  (N.  Y.),  157 
Serial  bonds,  214,  215 
Share  ledger,  71,  72 
Shares, 
par  value  of,  9 
value  unspecified,  17 
Sinking  funds,   204,  279-304 
account,  98,  289 
adequate  deposits  necessary,  284 
annuity  method  for,  285 
formula  for  calculating,  286, 
287 
balance  sheet  treatment  of,  301, 

302 
cash,  investment  of,  284 
creation  of,  280 
definition,  279 
instalment  entries,  291 
interest,  292 

accrual  entries,  293 
investment  entries,  293-296 
mines,  exhaustion  of,  331,  332, 

333 
preferred  stock  retired  by  means 

of,  287 
premiums,  297 

railroad.    Interstate    Commerce 
Commission     regulations, 
289,  290 
reserve  account,  98,  99 
entries,  299,  300,  301 
Interstate  Commerce  Commis- 
sion regulations,  289,  290 
method  of  establishing,  283 


INDEX 


561 


Sinking   funds — continued 

safeguarding,  283 

timber  companies,  280 

trustee,  283 

trustee's  books,  entries,  302-304 
Social  corporations,  2,  91 
"Split"  stock  certificate,  65 
Sprague,  Charles  E., 

quoted   on    sinking    funds,   285, 
294 
Statements,   financial,      (See  also 
"Reports") 

balance  sheets,  339-343,  356,  357 

cash  receipts  and  disbursements, 
349-351 

forms  of,  338-351 

income  and  profit  and  loss,  343- 

349,  358,  359 
manufacturing  corporation,  352- 

364 
balance  sheet,  356,  357,  363 
manufacturing    account,    355, 

363 
trading  and  profit  and  loss  ac- 
count, 358,  359,  363 
trial  balance,  352,  353 
profit  and  loss,  343-348 
trading  corporation,  365-373 
balance  sheet,  368,  369 
comparative    in    percentages, 

370 
trading  and  profit  and  loss, 

367,  368 
trial  balance,  365,  366 
Statutory  provisions, 

bond  issues  affected  by,  199 
Statutory  requirements,    (See  also 
various    states    by    their 
names) 
meetings,  30,  31 
stock  ledger,  71 
Stock     (See  "Capital  stock") 
Stock  book,  71,  72,  73,  74,  75,  162 


method  of  keeping,  72,  73,  74,  75 
New  York  forms  of,  75,  76 
Stock  corporation,  2 
Stock  discount  account,  88,  113 
Stock  dividend   (See  "Dividends") 
Stockholders,  2,  9 
annual    meeting      (See    "Meet- 
ings") 
interest  indicated  by  shares  of 

capital  stock,  18 
liability  limited,  13 
meeting,  first,  160,  161 
call  and  waiver  of  notice,  537 
minutes  covering,  534-536 
meetings,  record  of,  15 
minority, 
cumulative  voting  advantages, 

12 
protection  of,  12 
of  record,  71 
rights, 
dividend  ownership,  136,  137 
examination     of     corporate 

books,  45 
voting,  12 
Stock  ledger,  71,  72,  169 

method  of  keeping,  72,  7;^,  74,  75 
Stock  scrip,  55 

instalment  payments,  56,  57 
Stock  transfer  book,  66 
Subscriptions,     (See  also  "Capital 
stock") 
account,  84 

notes  given  in  payment  of,  49 
payment  of,  60 
Surplus, 
account,  93,  94,  3^-337 
contributed,  335 
dividends    equalized    by   means 

of,  134 
falsified   by   inflation  of  assets, 

94 
investment  of,  336 
losses  provided  for  by,  134 


562 


INDEX 


Surplus — continued 

not  for  dividend  purposes,  ac- 
count (See  reserve,  perma- 
nent, 99) 

unappropriated  profits,  92 


Taxes, 

corporation,   14 
city,  42 

Federal  Income,   14,  42,  43 
franchise  tax  payable  (N.  Y.), 
42 

inheritance,  14 

state,  14 
Tax  reports, 

federal,  local,  and  state,  15 
Telegraph    (See "Public utilities") 
Telephone    ( See  "Public  utilities") 
Terminal  bond,  219 
Terminology,  bonds,  202,  203 
Timber  companies, 

sinking  funds  for,  280 
Timber  lands,  exhaustion  of, 

sinking  fund  covering,  J32 
Trading  account, 

manufacturing  corporation,  358, 

359 
trading  corporation,  367,  368 
Trading  corporation, 
statements,  365-373 
Transfer  agents,  65 
stock  book  or  ledger  required  in 
N.  Y..  75,  76 
Transfer  books,  66 
closing  before  annual  meetings, 

31,  32 
closing  before  payment  of  divi- 
dends, 135 
Transfer  register,  67,  68 
Transportation    (See  "Public  util- 
ities") 


Treasurer, 

duties   of,  7,  8 

New  York  state,  157 
Treasury  bonds     (See  "Bonds") 
Treasury  stock,  19,  21,  87,  1 19-128 

asset  of  corporation,  22 

salable  below  par,  21 

trustee,  22 
Trial  balance, 

closing  of  books,  322 

manufacturing  corporation,  352, 

353 
trading  corporation,  365,  366 
Trust  companies, 
capital  stock  issued  at  premium, 

116 
capital  stock  subject  to  special 
liabilities,  20 
Trust  company  as  receiver,  482 
Trustee, 
bonds  conveyed  to,  200 
certificate,  226,  227 
corporate    bond    issues,    duties, 

230 
treasury  stock,  22 


U 


Underlying  bond,  213 
Underwriting, 

expenses,  183,  184 

treasury  stock  as  bonus  for,  184 
Undivided    profits       (See    "Sur- 
plus") 
Unissued  stock  account,  81,  82,  83 
United  States  Government, 

corporate  reports  required,  386 

income  tax  on  corporations,  386 
United   States   Steel   Corporation, 

bonds,  212 

bonds,    coupon    form,    221-223, 
225,  226 

bonds,  redeemable  issue,  216 

capitalization,  10 


1 


INDEX 


563 


United   States   Steel   Corporation 
— continued 
convertible   stock  and  bond  is- 
sues, 26 
holding  company,  129,  442 
reserve  for  depreciation,  332 
reser\'es   for    insurance,   benefit 

and  Occident  funds,  333 
sinking  fund  premiums,  297 
sinking  fund  provisions,  281,  282 
trustee's  certificate,  form  of,  227 
Unsubscribed   stock      (See   "Un- 
issued stock") 
Usury, 

bonds,  sale  of,  205 
Utilities     (See  "Public  utilities"') 


Vice-president,  duties  of,  7 
Victor  Talking  Machine  Co., 

good-will,  treatment  of,  180 
Voting, 

capital  stock  owned  by  corpora- 


tion issuing  it  has  no  vote, 
22 

capital  stock,  unissued,  has  no 
vote,  19 

cumulative,  12,  36,  37 

formula   for   determining  num- 
ber of  votes,  37 

preferred  stock  rights,  24 

proxy,  31,  33,  39 

stockholders,  rights  of,  12 
annual  meeting,  32 

W 

Waiver  of  notice, 
directors'  meeting,  42,  540,  541 
stockholders'  meeting,  161,  537 

Watered  stock,  27,  28 

''Watering  the  assets,"  94 

Withdrawal, 
individual,  does  not  affect  cor- 
poration's existence,  6 

Working  capital  donated  account 
(See  "Donation  account") 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 

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Graduate  Scliool  of  Business  Administration 
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ORMAL  SCHOOL 


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